Are Inflation Concerns Likely to Boost Gold’s Performance?



Gold versus other assets

When goods are expensive and above reasonable prices, it can be the result of inflation. Equity and debt investments aren’t ideal during these times as fear settles in among investors. They’re afraid of buying the asset at a higher price and it underperforming. Historically, gold has performed well during high inflationary periods. It sinks lower during deflationary periods.

Oil contributes a significant chunk to the inflation number. As oil has rebounded, we could start to see inflation rise, which might make it wise for investors to fill up their portfolios with gold.

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Inflation concerns

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.

The difference between yields on ten-year US notes and similar-maturity TIPS, a gauge of price expectations, expanded to as much as 1.7% last Tuesday, the widest the difference has been since May. The Federal Reserve targets 2% inflation.

Funds and miners may follow

Mining stocks and funds could closely follow gold and other precious metals if they do indeed see a rise. The funds that closely associate with gold and silver include the PowerShares DB Gold Fund (DGL) and the VanEck Merk Gold Shares (OUNZ). The mining shares include IAMGOLD (IAG), Coeur Mining (CDE), Alamos Gold (AGI), and Harmony Gold (HMY).


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