Summary
- The term “reflation” is used in this post to refer to an increase in certain commodity prices due to the expectation of increased economic activity.
- The term “inflation” refers to an increase in certain commodity prices due to currency devaluation.
- When we look at the past 12-month period, copper has been increasingly outperforming silver, and silver outperforming gold.
- The patterns above suggest reflation, which is generally bullish for equities going forward.
Reflation versus inflation
The term “reflation” is used in this post to refer to an increase in certain commodity prices due to the expectation of increased economic activity. The term “inflation” refers to an increase in certain commodity prices due to currency devaluation. Generally speaking, reflation would be bullish for equities, and inflation would not.
12-month commodity trends: Copper, silver, and gold
A sign of reflation would be a 12-month trend characterized by copper outperforming silver, and silver outperforming gold – in terms of price. Inflation, on the other hand, would be characterized by gold outperforming silver, and silver outperforming copper.
The figure below shows the past 12-month performances, in terms of price increases, for the following commodity funds: SPDR Gold Shares (GLD), iShares Silver Trust (SLV), and United States Copper Index Fund, LP (CPER). The performances are measured by percentage increases in prices for the past 12 months, 6 months, and 3 months.
As you can see, the trend for the past 12 months has been one of copper increasingly outperforming silver, and silver outperforming gold. Silver has actually done better than copper when we consider the entire 12-month period, but copper has been significantly outperforming silver more recently – in the past 6 and 3 months.
The patterns above suggest reflation, which is generally bullish for equities going forward. These patterns are particularly bullish for “banks and tanks” equities, and also for commodities in general – more so for commodities that have an industrial use.
