Is The Reflation Trade In?

Real-time Inflation Indicator (per annum): 7.8%

You probably noticed the commodity and foreign exchange market reaction to the U.S. Federal Reserve's buying binge Thursday. Commodity ETFs were big winners on the day as hopes for stronger economic growth and increased demand drove futures prices higher.

The GreenHaven Continuous Commodity Index ETF (NYSE: GCC) rose 3.7% on the day, while the iShares S&P GSCI Commodity-Indexed Trust (NYSE: GSG) and the PowerShares DB Commodity Index Tracking Fund (NYSE: DBC) gained 2.8% and 2.1%, respectively. Global commodity stocks, represented by the Market Vectors Hard Assets Producers ETF (NYSE: HAP), sailed upstream 1.3% facing the opposing currents of weaker dollar and equity markets.

There have been signs of basing in the commodities market for some time now. Take crude oil for example. Thursday, nearby futures on the benchmark U.S. oil grade settled above $50 a barrel for the first time since November, putting a flourish on a rounding bottom on the chart as refining margins and a once-virulent contango have descended from the stratosphere.

 

Nearby NYMEX Crude Oil Futures (And Implied Refining Margins)

 

Gold, for its part, snapped back from an apparent breakdown through neckline support in a head-and-shoulders top in overnight trade Wednesday and in the follow-through on Thursday. Thursday's close of $959.20 in the April COMEX contract put gold tantalizingly close to a key retracement from recent lows. A follow-on close above $960 could set up a serious assault on the $1,007.70 February peak.

 

Nearby COMEX Gold Futures

 

But you just knew all this was going to happen, right? I mean, if you read this column daily, the signal flashed at you daily in its subhead.

Take a look at today's Real-time Inflation Indicator. It's ticked up to 7.8% now, the eleventh consecutive rise since March 5. The rate's increased more than 0.9% in just the past two trading weeks. We've had run-ups in the monetary inflation rate before, most notably in December when a near-vertical ascent by the euro cheapened the greenback at a 3.1% annualized rate over 13 trading days.

The slower rate of monetary inflation now redounds upon its staying power. This isn't, it seems, a quick-fire unwinding we're seeing. The market's exhausted itself of sellers, at least of bellwether oil, over the past couple of months. And, for now, euros.

We'll watch carefully how the gold trade wraps up today.

 

U.S. Monetary Inflation

 

NOTE: Traders following Stephen Schork's recommendation to trade long-term oil option spreads have fared well since March 5. That day, our column "Oil Spreaders Heed Schork's Call," described near-the-money and out-of-the-money bull call spreads on March 2010 crude futures. Thursday, the long-dated contract settled at $61.15. Though only one of the spreads has gone into the money, both have gained 66% to date.