Gasoline prices have been climbing steadily since 2009. But it’s about the only commodity that’s sustained such a strong upward price-trend these past five years.
We’re clearly in a deflationary environment, with debt deleveraging and falling asset prices. At the same time, the Fed’s stimulatory efforts are brewing inflationary pressures just below the surface. So I stay on the lookout for any sign of the resurgence of inflation.
I do this by watching two things: commodity and bond prices.
Commodity prices increase with inflation. Bond prices decrease with inflation. By taking a ratio of the two I have a handy inflation indicator. When inflation is increasing, the ratio increases.
As you can see, gasoline clearly signals the building of inflationary pressure since 2009.
Yet, crude oil, corn and wheat all point to deflation.
This trend has been in force for some time and shows no sign of reversing. That means anyone investing on the expectation of inflation is getting crucified… gold bugs — who buy gold as an “inflation hedge” — can tell us how this feels.
Instead, you should invest for deflation.
One way to play this — if you want to stay hedged — is with a spread trade: selling gasoline and buying Treasury bonds.
That’s exactly what I recommended Survive & Prosper readers to do about five months ago. Specifically, I said to sell short the U.S. Gasoline Fund ETF (ARCX: UGA) and to simultaneously buy an equal dollar amount of the iShares 7-10yr Treasury Bond ETF (ARCX: IEF).
So far, this trade has netted an open profit of 8%. Take a look…
Over the long run, I expect to see gasoline prices come down even further… joining the deflationary trend we already see in oil, corn and wheat.
On a six- to 12-month timeframe, this spread could widen to upwards of 20%… so there’s still time to get in.