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If you followed the advice I put forth in Survive & Prosper on August 15, just over a month ago, you’re likely sitting on a nice little gain of about 7%. That’s more than double the return you’d have earned simply investing in the S&P 500 (SPY), which is up a respectable 2.8%.

I’ll be honest… I’m really tired of reading everyone’s speculative guesses on the Fed’s next move. I partly blame the Fed for being more mouthpiece than policy-maker – all in the name of “transparency,” right? And I partly blame the mainstream media pundits, for obsessing over the “will he or won’t he?” taper question instead of offering investors keen, actionable advice.

I remember pondering, just briefly, the Fed’s likely next move last month, when I wrote this Ahead of the Curve piece, in which I recommended: “Sell gasoline (UGA), Buy T-bonds (IEF).”

I began at the Fed’s dual mandate: maximum employment and stable prices (read: keep inflation in check). And knowing the Fed’s failure, so far, in fixing the job market I started searching for signs of inflation. Had I found any, I would have concluded the Fed’s taper plans were at least partially warranted.

But instead of finding signs of inflation… I found deflationary trends in almost all markets, except for gasoline. And that observation turned into the opportunity to earn a nice 7% gain over the past month.

Here’s the ratio chart (gasoline : T-bonds) I had on my screen at the time.

See larger image

These ratios – with a commodity market in the numerator and T-bond prices in the denominator – are great real-time inflation indicators, as I’ve written about before.

When I looked at corn, wheat, crude oil and gold… all the ratios pointed to a clear conclusion: deflation. Yet gasoline was the outlier, showing the only pocket of inflation I could find.

I concluded that deflation, indeed, was the dominant trend… and that it was only a matter of time before gasoline prices fell in line – falling under the weight of deflationary pressures that were already keeping a lid on corn, gold and oil prices.

And that’s exactly what happened.

Since I recommended betting against gasoline prices (i.e., selling short), the U.S. Gasoline ETF (NYSE: UGA) dropped 7.4%. Meanwhile, I recommended buying the iShares 7-10yr Treasury bond ETF (NYSE: IEF), which is down just 0.5% over the same time.

That’s put the net gain on this trade at 6.9%.

Not bad for a month’s worth of “work.” Now, take your profits and go buy a (now cheaper) tank of gas.

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Adam O'Dell
Adam O'Dell has one purpose in mind: to find and bring to subscribers investment opportunities that return the maximum profit with the minimum risk. Adam has worked as a Prop Trader for a spot Forex firm. While there, he learned the fundamentals of trading in the world’s largest market. He excelled at trading the volatile currency markets by seeking out low-risk entry points for trades with high profit potential. An MBA graduate and Affiliate Member of the Market Technicians Association, Adam is a lifelong student of the markets. He is editor of our hugely successful trading service, Cycle 9 Alert.