Now that summer is in full swing, and restaurants and other public places are laying out their “Welcome” mats once again, I hope you are taking full advantage of the opportunity. I hope you’re planning barbecues, going on camping trips and jetting off to Europe.

In other words, I hope your post-pandemic summer is close to what used to pass for “normal.”

Meanwhile, however, the stock market is starting to exhibit behavior that is far from normal. For starters, the major stock market averages keep hitting new all-time highs, even though some inflation indicators are hitting 20-year highs.

That’s not normal.

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But it’s not as abnormal as the fact that many of the most speculative — and least profitable — stocks in the entire market are delivering some of the strongest gains, while many of their profitable, fast-growing counterparts are merely muddling along.

This quirky version of “narrow participation” means that our record-setting stock market is setting records with fewer and fewer participants. That’s not usually a favorable omen for the overall market.

The 14-day rolling average of new 52-week highs has tumbled to its lowest level since last November. And as you might notice in the nearby chart, a sharply declining drop in new highs often presages a meaningful market decline.

In keeping with the market’s recent blasé behavior, most of the stocks in my Fry’s Investment Report portfolio trades have been treading water — not really advancing or falling.

Two particular sectors have been faring worse than the others: precious metals and travel-related stocks. The last few weeks have not been kind to our trades in either sector. To put it even less charitably, these trades “aren’t working” at the moment.

Such setbacks are unpleasant, to say the least. But I believe both sectors are still loaded with potential that will reward investors over the coming months.

Today, I’ll show you why I think precious metals are set for a comeback. (We’ll tackle the travel sector next week.)

And I’ll show you how you can get in on them before they take off once again…

How Precious Metals Could Regain Their Shine

To get a handle on the struggling gold and silver market, we need to pull back and take a high-level view of the inflationary trend that is producing the highest Consumer Price Index (CPI) readings in more than a decade.

Apparently, most stock investors consider inflation a nonthreat. Otherwise, the stock market would not be hovering near all-time highs.

The widespread complacency about inflation is a bit curious, but the reason why is clear.

Most investors seem to believe Jerome Powell’s Federal Reserve is more powerful than any inflationary threat. Although Powell has acknowledged the rising inflationary trend, he insists it will fade away before causing any serious harm to the economy.

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Additionally, the Fed has stated that it stands prepared to fight inflation by raising interest rates as “soon” as 2023. In times past, such nonchalant “inflation-fighting” by the Fed would have spooked investors, not comforted them. But we do not reside in times past.

In the present, investors are cheering the Fed’s anti-inflation rhetoric by buying stocks and bonds… and by selling gold and silver. The two precious metals have both slumped about 5% since the day in mid-June when Powell suggested rate hikes might begin in 2023.

At the risk of stating the obvious, 2023 is far, far away. So, Chairman Powell’s apparent “vigilance” toward inflation may be the exact opposite. Inflation could rise more swiftly and ferociously than Powell and his FOMC colleagues anticipate.

In that event, interest rates might soar much higher than most investors expect… and precious metals prices might also move higher than most investors expect.

While a new phase of rising gold and silver prices is far from certain, that potential outcome remains a strong possibility, based on historical precedent.

“Easy Money” Is Getting Easier

Admittedly, precious metals are a somewhat mystical asset class. As such, they do not lend themselves to any classic form of securities analysis. They don’t operate a business, produce earnings, or maintain a balance sheet.

They simply hang out and glitter in the sun until somebody wishes to own them.

At the moment, few investors are clamoring to buy either metal or the shares of companies that mine them. Perhaps this indifference toward gold and silver will persist, no matter how high the inflation rate might soar.

But as I’ve pointed out previously, “easy money” policies tend to promote a rising gold price, all else being equal. And monetary policy has never been easier than it is today, as the chart below shows.

Allow me to explain…

The gold line shows the annual inflation rate, based on the CPI. The blue line shows the level of the CPI minus the Fed Funds Target Rate (Lower Bound). This rate is usually called the “Fed Funds Rate” because it is the one the Federal Reserve moves up or down when it “sets interest rates.”

Usually, a high or rising CPI rate causes the Fed to raise the Fed Funds Rate, with the idea that raising rates will cool of the inflationary trend. Conversely, when inflation is falling the Fed might lower Fed Funds, as a way to stave off possible deflation or a recession.

But on the far right-hand side of the chart, we see something we don’t usually see. Inflation is rocketing higher, but the Fed has been lowering interest rates … not raising them.

To be sure, the Covid-19 pandemic gave the Fed cause to hit the panic button and lower rates. But this chart suggests the Fed’s low rates may be overstaying their welcome.

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In other words, they may be contributing to an inflationary trend that may be difficult to contain a few months down the road. Whatever the case, the chart clearly shows how far the Fed is pushing the “easy money” envelope.

At the same time, runaway government deficits also tend to promote a rising gold price … and the current federal deficit is larger than any we’ve seen since World War II.

These powerful factors should combine to put upward pressure on the inflation rate, which should put downward pressure on the dollar… and lift the prices of gold and silver.

In other words, these two factors should exert a more powerful influence over the inflationary trend than any rhetoric issuing from the Fed. At least that’s what the history books tell us should happen.

Bottom line: Inflation isn’t automatically a boogeyman that will tear stock prices to shreds, but neither is it automatically an innocent bystander.

Therefore, hang in there on any gold and silver positions you currently hold.

As well, I’ve made numerous precious metals recommendations to subscribers to my Fry’s Investment Report letter. Many of them are now back in “Buy” range.

To learn how to join us, click here.

Regards,

Eric Fry

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NOTE: On the date of publication, Eric Fry did not own either directly or indirectly any positions in the securities mentioned in this article.

Eric Fry is an award-winning stock picker with numerous “10-bagger” calls —in good markets AND bad. How? By finding potent global megatrends… before they take off. In fact, Eric has recommended 41 different 1,000%+ stock market winners in his career. Plus, he beat 650 of the world’s most famous investors (including Bill Ackman and David Einhorn) in a contest. And today he’s revealing his next potential 1,000% winner for free, right here.