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Gold and the Inflation Indicator

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Gold and inflation

Data released on Thursday, October 29, likely caused the US dollar to fall. The DXY Currency Index, which encompasses the major world currencies, retreated 0.05% on Thursday, extending the losses from the previous day. The new GDP (gross domestic product) figures showed that the preferred PCE (personal consumption expenditures) measure of inflation continued holding at the same level as last month. For analysis purposes, we use the US ten-year break-even inflation as a proxy for inflation. The US Treasury ten-year break-even is the spread between the ten-year Treasury yield and the TIPS (Treasury inflation-protected securities) yield.

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Gold is often seen as a hedge against inflation. If inflation is set to rise, we may expect gold to rise as well. However, precious metal prices have been set for a decline on a five-day trailing basis. The chart above shows the relative price movements in the price of gold and the break-even inflation rate.

Tracking ETFs and miners

With inflation remaining sticky and real growth in the United States sinking 0.3% annually, the statistics from Thursday gave a weak outlook for the US economy. Precious metals fell sharply on Thursday following reports of a likely interest hike in December. Some long positions on gold by speculators saw a reversal as the price slipped below $1,180 an ounce. However, October was positive for mining-backed ETFs such as the Sprott Gold Miners ETF (SGDM) and the VanEck Vectors Gold Miners ETF (GDX). Both ETFs gained 14.5% and 10%, respectively.

Most mining companies also saw positive returns on their prices in October. Companies such as First Majestic Silver Corp. (AG), Newmont Mining Corporation (NEM), and New Gold (NGD) saw a rise in their prices. These three companies contribute 8.3% to the VanEck Vectors Gold Miners ETF (GDX).

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