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How Gold Is Used as a Hedge against Inflation


Jan. 31 2017, Published 11:03 a.m. ET

Gold hedge

Gold depends on an important factor that could have a strong influence on it and play a major role in the determination of its price. That factor is inflation. Gold is said to be a hedge against inflation.

When prices rise, investors can park their money in gold. At times, the price of gold and the inflation rate have a direct relationship, and the hedge doesn’t hold. How well gold can protect investors against inflation remains unclear.

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The graph below compares gold prices with the inflation rate. To describe inflation in the United States, we can use the yield spread. It measures the difference between the ten-year US government bond yield and TIPS (Treasury inflation-protected securities). Precious metal prices mainly take from US inflation numbers rather than other countries’ numbers.

Mining funds and shares impacted

With higher inflation surges, there could be a stronger demand for gold. Fears of a resurgence in the Eurozone’s inflation gripped the market in the past few weeks. Brexit concerns also continue to lure the overall financial markets.

Fluctuations in precious metals can be studied by way of investments in funds such as the iShares Gold Trust (IAU) and the iShares Silver Trust (SLV). These two funds had 30-day trailing gains of 2.9% and 5.1%, respectively.

Mining shares also track precious metals closely. Yamana Gold (AUY), Pan American Silver (PAAS), Coeur Mining (CDE), and Barrick Gold (ABX) have risen 18.7%, 23.7%, 21.0%, and 20.1%, respectively. Combined, these four miners contribute about 13.0% to the fluctuations in the VanEck Vectors Gold Miners ETF (GDX).


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