Market Update: Beware of the inflationistas

I highlighted several times the discrepancy between commodities and bond yields on the one side (sideways to lower) and equities on the other (up). As written in Commodities and related markets to fall first? I expect more downside in commodity prices in general amid a lack of end-demand which will subsequently spill-over into equities whereas government bonds should remain well supported. However, given that gold has traded higher recently and amid a falling USD, several market commentators have suggested that inflation pressures are resurfacing. This would clearly have vast implications from an asset-allocation perspective and run completely against my proposed stance.
However, I disagree with this inflationary view. I have frequently made the fundamental case for ongoing disinflation (amid a very high level of unused capacity and low credit creation). Furthermore, I also think that it would provide an inconsistent picture about what is currently happening in global markets. If inflation fears were indeed rising, then why are commodities in general not rising and why are government bond yields falling (with US yields at the short and long end outperforming their international counterparts)? Rather, I think, markets are not sending any signal about rising inflation fears:
First, last week I suggested that the price action in Gold might well be down to Barrick Gold buying back their gold hedges (which increases demand for gold now but also increases future net-supply). This would explain the surge in gold prices but would not send any inflationary signals.
Second, if inflation fears would be rising, it would be the ultra-long bonds which should send the least bullish/most bearish signal from the government bond market. On Friday, I suggested that 30y UST yields were sending an encouraging signal for the entire US Treasury market as they trade in a downward trend and try to overcome a strong support area in between 4.10-4.20%. Furthermore, and in contrast to its 10y counterpart, it has already traded through its former July yield-low and sends a bullish technical signal. So again, no inflation signal from this part of the market.
Third, the fall in the trade-weighted USD might well be down to USD Libor rates for the first time falling below their Japanese counterparts and rendering the USD the new funding currency of choice for carry trades, or at least reducing its appeal as an investment target. Both, make it more difficult to finance the current account deficit. However, as the experience of the Swiss and the Japanese economies have shown, a carry trade currency does not need to be mirrored by rising inflation rates. Therefore, the weakening USD - rather than signalling rising inflation expectations which would go hand-in-hand with rising yields - might well be down to USD rates dropping more than elesewhere amid low inflation pressures.

USDJPY: pressured downwards by falling USD yield advantage

Source: Bloomberg, Research Ahead

Fourth, within the commodities space it is so far mostly gold (and silver) which move higher, whereas the broader commodity complex continues to trade in a sideways to lower fashion. Frequently, gold shows a different behaviour than most of the other commodities. The chart below compares gold with the CRB index and shows that expecially during the past 12 months, there has been a significant discrepancy.

Gold and the CRB-index: not much co-movement

Source: Bloomberg, Research Ahead

On the other side, oil is much closer correlated with the CRB-Index (yes, energy has a larger weight in the index than gold but it is also true for other commodity indeces):

Source: Bloomberg, Research Ahead

Energy (as well as several base metals and agricultural commodities) are continuing to trade in a sideways to lower fashion and are not sending any inflationary signal which would confirm the rise in gold prices.

Overall, I would warn of any inflationary explanation of the recent rise in gold prices and the fall in the USD as it is inconsistent with current market behaviour. Rather, I think that gold is rising due to a special factor (the buying back of former gold-hedges) and the USD is falling amid reduced yield pick-up (given a DROP in US yields on an absolute basis and relative to their international counterparts). Overall, the fundamental picture calls for ongoing disinflation amid exceptionally high unused capacity and limited credit creation and market developments do not stand in this way. I still maintain my view that inflation pressures are very low and commodities should suffer further in the weeks and months ahead, ultimatley being followed by equity markets trading significantly lower again whereas government bonds remain supported.