As precious metals have steadily fallen for the past few weeks, investors have been trying to read the increase in Treasury yields during the same period. Within a matter of only two weeks, the ten-year Treasury yields rose from 1.7% to 2.4%. The rise in rates is mostly likely due to the increased spending that Trump has proposed—and also his proposed tax cuts. Most market analysts are expecting the interest rate to be hiked during the upcoming Fed meeting in December.
Inflation is also likely to rise with increased spending expectations in the coming months. Historically, gold has performed well during periods of high inflation, and it has fallen during deflationary periods. Oil contributes a significant amount to inflation. As oil has rebounded, we could start to see inflation rise, which could make it wise for investors to fill their portfolios with gold.
US breakeven inflation rate
For analysis purposes, we’ll use the US 10-Year Breakeven Inflation Rate as a proxy for inflation. The US Treasury 10-Year Breakeven Rate is the spread between the 10-Year Treasury yield and the TIPS (Treasury Inflation Protected Securities) yield.
The difference between yields on 10-Year US Treasury notes and the similar-maturity TIPS, which is a gauge of price expectations, expanded to as much as 1.9% on November 21, 2016. According to Goldman Sachs, the 10-Year US Breakeven Inflation Rate will rise further. After the announcement of the US election results, the rate showed an uptick. Goldman Sachs has advised investors to go long on the rate.
Mining stocks and funds could follow gold and other precious metals if they do see a rise. Funds that closely associate with gold and silver include the Physical Swiss Gold Shares ETF (SGOL) and the Physical Silver Shares ETF (SIVR). Mining stocks that follow gold and silver include Harmony Gold (HMY), Sibanye Gold (SBGL), Gold Fields (GFI), and Coeur Mining (CDE).