Inflation Rates: How They’re Related to Precious Metals

With the looming fears of inflation reaching its target 2% level, the Fed is likely waiting for assertions from the economy. The Fed’s rate hike expectations are likely determined by how efficiently and quickly the inflation rates leap and get closer to the targets. In turn, the rate hike will determine gold’s directional move.

Gold is sorted for its store of value compared to other assets. People often seek gold as an investment class when uncertainty is rising in the markets. However, gold doesn’t have an exact linear relationship with inflation. The above chart explains that gold isn’t a perfect inflation hedge.

Consumer inflation slowed in July after two months of slightly faster gains. The CPI (consumer price index) rose 0.40% in May, 0.30% in June, and 0.10% in July. This is a downward trend. It’s negative for the liftoff and likely beneficial for gold lovers.

Gold rose on the safe-haven call by 0.55% on Friday, August 21. It closed at $1,159.60 per ounce. It also hit a high of $1,167.90 on the same day due to the Chinese markets’ unrest extending over the global markets.

Other precious metals like silver fell ~1.38% and settled at ~$15.38 on Friday, August 21. Platinum and palladium fell 0.75% and 3%, respectively, on likely concerns of commodity oversupply. ETFs like the SPDR Gold Shares ETF (GLD) rose 0.60% due to rising gold prices. The rising prices are backing GLD.

Mining companies have suffered the most carnage from falling precious metal prices. The recent July rout has resulted in extreme shorting of the mining stocks. Businesses have had adverse experiences during July and the past year. Gold mining companies like Sibanye Gold (SBGL), Iamgold (IAG), Kinross Gold (KGC), and Coeur Mining (CDE) have fallen considerably during the last month. Even the returns for the past trading month are negative despite the rise in gold prices. Combined, the companies contribute almost 6.90% to the VanEck Vectors Gold Miners ETF (GDX).