On Wednesday, the Federal Reserve announced its seventh rate hike of the current tightening cycle. Two more are expected to come this year.
In response, gold prices rose, trading up $4.50 to more than $1,300 per ounce. Silver surged too, with a string of daily gains from a low of $16.37 to $17.08.
Did you expect anything different?
If you did, you haven't been reading...
Last September, and again in January, I made the point that while conventional wisdom says rate hikes hurt gold prices, the actual data tells a completely different story.
Look at the last two monetary tightening periods - in February 1994 and June 2004 - and you'll see a nearly identical pattern: The dollar weakens and gold rises.
It's counterintuitive, but true.
In both those cases, the dollar strengthened before the first rate hike, but then weakened by around 8% over the next six months. The dollar index then remained consistently below its level on the day of the first rate hike for the next two to three years.
Meanwhile, gold more than doubled from 2004 to 2008, shooting from $400 per ounce to nearly $1,000 per ounce.
What all this data and historical precedent says, basically, is that the market tends to overestimate the effect monetary tightening has on the dollar, and thus on gold.
That leads to an unsubstantiated strengthening of the former and an unjustifiable weakening of the latter.
That's exactly what we're seeing now.
And that's not all.
We're also seeing something else we haven't seen in a long time: Inflation.
The producer price index jumped 0.5% in May, the Labor Department said Wednesday. Wholesale costs rose at a yearly rate of 3.1% in May, marking the highest level since early 2012.
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Gas prices jumped almost 10% in May (the biggest increase since last fall) and steel mill products made a 4.3% jump (their largest in seven years).
The latter was largely the result of President Trump's newly implemented tariffs on steel products, which are already affecting market and import prices.
The import price index rose 0.6% for the second straight month in May, while the increase in import prices over the past 12 months rose to 4.3% from 3.6%. And those prices will continue to go higher as tariffs start to bite.
So if you're reading the tea leaves, things are looking up for gold - especially since the market has already factored headwinds into the metal's price.
Indeed, hedge fund holdings of gold futures contracts have dropped to a near two-year low. And holdings in gold-backed exchange-traded funds dropped by 34 tonnes in May, falling from a five-year high.
Even still, gold prices weathered that exodus fairly well. That indicates gold has established a pretty solid floor, and that there's far more room to the upside.
As Ole Hansen, head of commodity strategy at Saxo Bank, put it: "The risk of another cat-out-of-the-bag rally has increased - not least considering the dollar rally showing signs of pausing following the recent run-up, US-China trade worries not going away, and rising inflation concerns keeping US real yields range bound."
"These observations are all pointing towards an imminent move in gold and while the downside may still be in play, the low level of hedge-fund participation makes us believe that the direction that could receive most momentum would be to the upside," Hansen said.
Now, the best way to play this probably isn't to buy gold proper, but rather to invest in mining companies that have not been properly valued by the market.
A good example would be the stock Nick Hodge recently stumbled across out in Idaho. That mining operation has found gold that's plentiful and cheap to mine, making it a shoo-in to shoot higher as gold prices gain momentum.
You can find out more about that here.
Fight on,
Jason Simpkins
Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of The Wealth Warrior, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page.