uploads///Gold versus VIX indicator

Could Trump’s Plans Boost Inflation, Hurt Precious Metals?

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Feb. 17 2017, Published 10:50 a.m. ET

Fed concerns

Patrick Harker, president of the Federal Reserve Bank of Philadelphia, repeated his view that the central bank should continue hiking interest rates this year. However, that didn’t give any buoyancy to the US dollar, and it fell marginally.

Gold is highly sensitive to rising US interest rates. A rate hike increases the opportunity cost of holding non-yielding bullion.

Fed members seem to acknowledge an economic risk for precious metals under the Trump administration. Volatility (VIXY) (VXZ) in the market has a substantial impact on gold due to its haven appeal.

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Gold investors are likely in a fix since overall sentiment favors the possibility of a rise in price. Market uncertainty is the primary reason for optimism in gold. However, Trump’s plans to increase expenditures could provide a boost to inflation, playing negatively on precious metals (IAU) (SLV). Market growth and stability are negative for haven assets.

VIX and precious metals

As you can see in the above graph, market volatility could be positive for gold. Gold’s correlation with market volatility, depicted above by the CBOE Volatility Index (or VIX), was high in 4Q16 when the Fed raised the interest rate for the first time in almost a decade.

Changes in precious metals also extend to mining stocks such as First Majestic Silver (AG), Alamos Gold (AGI), Coeur Mining (CDE), and Hecla Mining (HL).

The overall political environment has a significant influence on precious metals and mining companies. The stance that Trump takes could dictate the direction of gold and its peers going forward.

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