uploads///Gold Price versus US  year Breakeven

Is Gold Still Dependent on the Inflation Numbers?

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Dec. 4 2020, Updated 10:52 a.m. ET

Fed member statements

Much of the changes in precious metal prices over the past few months have been determined by the stance of the Federal Reserve and its members over the rate hike conundrum. Janet Yellen, chair of the Federal Reserve, noted that the Fed is planning to change the annual stress tests it gives to US banks. The test results would reveal whether the banks can withstand a massive financial crisis.

Charles Evans, the president of the Federal Reserve Bank of Chicago, stated that raising rates because of financial stability concerns could leave the US central bank less able to reach its inflation target. Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, noted the central bank could keep rates low for a while as inflation remains weak.

Inflation, as we know, has a strong link to the price of gold, which is often used as a hedge against rising inflation. If inflation rises above the required number, investors could rush to gold as a safe-haven asset.

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Ten-year break-even

The graph above compares gold prices with the inflation rate. To describe inflation in the US economy, we can use the yield spread, or the break-even spread. This measures the difference between the ten-year US government bond yield and TIPS (Treasury inflation-protected securities). The principal invested in TIPS is adjusted in line with the CPI (consumer price index). The yield spread, therefore, seems to be a good proxy for the US inflation measure.

Notably, fluctuations in gold prices also significantly impact funds like the iShares Gold Trust ETF (IAU) and the iShares MSCI Global Gold Miners ETF (RING). These two funds have seen rises of 20.6% and 89.8%, respectively, on a year-to-date basis.

Mining shares that have benefited from the strength in precious metals in 2016 include Hecla Mining (HL), Eldorado Gold (EGO), Iamgold (IAG), and Alacer Gold (ASR). Together these three shares comprise 7.1% of the VanEck Vectors Gold Miners ETF (GDX).

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