The Reflation Trade Emerges, Again (USO, OIL, GLD, GDX, DBA)

Some good news in the markets today and the massive influx of future money from the Fed and Treasury has led to a substantial increase in both crude oil and gold prices. NYMEX crude futures are up more than $3/barrel, and London gold is above $950/ounce after falling below $890/ounce yesterday.  Yesterday, it was the exit of fear driving the markets, now the notion of “inflation coming around the corner” is back.

The likeliest reason for these moves is the Federal Reserve’s decision to spend another $300 billion to buy long-term Treasury bills over the next six months. Investors see this as a sign that the economy will strengthen, and taken together with the recent rise in financial stocks, equities once again become a good value. The Fed also agreed to buy more mortgage-backed securities and agency debt yesterday, bringing the number to $1 trillion or more.

As equities rise, the expectation is that energy consumption will rise, and that inflation will follow. Thus, both oil and gold prices go up.

Oil ETF United States Oil Fund (NYSE: USO) and ETN iPath S&P GSCI Crude oil Total Return Index (NYSE: OIL) are both up about 3% this morning.

SPDR Gold Shares (NYSE: GLD) is up a fraction and Market Vectors Gold Miners ETF (NYSE: GDX) is up nearly 4%.

Powershares DB Agriculture ETF (NYSE:DBA) is up about 3.5% in early trading as well, indicating that ag futures are also contributing to today’s uptick.

Ben Bernanke and everyone in the government keep talking about how inflation is expected to be low for the near-term.  But the printing presses are just about to go into overdrive to print paper with many Ben Franklin pictures on them.

Paul Ausick
March 19, 2009