It is a compelling graphic. Commodities are crazy cheap relative to equities. While this is already attracting attention in my world, at some point it will attract attention more broadly. Will that point require a correction in the US markets? Probably, but a correction is also quite likely. Does inflation play a role? Absolutely. Commodities perform well in inflationary environments – all prices do, but of course within that gold is a hedge against inflation, which bolsters the performance of metals as a group.
So is inflation coming? Yes. The Fed can only push and push so much for inflation before it will appear…likely more and stronger than they want. It’s like when I was drizzling chocolate on biscotti over the holidays. The melted chocolate was in a ziplock bag and I cut a tiny hole in the corner. It worked but it was frustratingly slow, so I made the hole just a touch larger…and the flood was unmanageable. There was chocolate everywhere!
Chocolate everywhere is a manageable disaster. Inflation everywhere is not. The fact that we’re seeing record real estate prices and art prices and stock prices – inflation is already here. It’s a question of when and how it manifests in everyday goods that will determine its real impact: on savings and spending.
As I’ve said before, at the moment wage inflation is the missing ingredient. Unemployment rates have been low enough for long enough that wage pressures have to be rising. This will be a key factor to watch in 2018.
But it’s not the only one.
All told, I think the easy prediction is that 2018 will be much like 2017: the US bull market will continue, gold will slowly strengthen, copper and zinc will do well, the Fed will gradually tighten, and so on. After all, a bull market is a bull market until it isn’t. From that perspective, my first guess is more of the same.
But there are a lot of forces or events that could derail the train. Paying attention to trends – like the yield curve, the dollar, inflation and real interest rates, wage inflation, metals stockpile levels, and the like – will be the only way to try to be ahead of such derailments. It’s a due your diligence kind of year.