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What Caused the Slump in the Precious Metals Market?

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Part 5
What Caused the Slump in the Precious Metals Market? PART 5 OF 6

How Rising Inflation Could Affect Precious Metals

Inflation during Trump administration

Just as overall market sentiment is affecting precious metals, inflation figures have also had a significant impact. Under the Trump administration, the chances of rising inflation numbers seem higher. Plans for increased spending and possible interest rate increases make for a better outlook for inflation going forward. Gold is often considered to be a hedge against inflation.

When prices rise, investors can park their money in gold. At times, the price of gold and the inflation rate have a direct relationship and the hedge doesn’t hold. How well gold can protect investors against inflation remains unclear.

How Rising Inflation Could Affect Precious Metals

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The graph above compares gold prices with the inflation rate. To describe inflation in the United States, we can use the yield spread. It measures the difference between the ten-year US government bond yield and TIPS (Treasury Inflation Protected Securities). Precious metal prices mainly take cues from US inflation numbers rather than other countries’ numbers.

Eurozone inflation

If inflation rises, there could be a stronger demand for gold. Markets have been watching the Eurozone’s inflation figures in the past few days. The consumer price inflation in the 19-nation Eurozone saw its largest rise since January 2013 at 2.0% for the last month.

Fluctuations in precious metals affect funds such as the iShares Gold Trust (IAU) and the iShares Silver Trust (SLV).

Miners like Pan American Silver (PAAS), Randgold Resources (GOLD), Franco Nevada (FNV), and Harmony Gold (HMY) fell on Thursday due to the pressure on precious metals.

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