Markets across the globe are observing rising inflation levels. Consumer price inflation has been picking up in Europe—near ~2% in February 2017. It has been the fastest increase in inflation since January 2013. The United Kingdom also saw inflation at 2.3%. It reflected the pound’s fall since the Brexit vote in June 2016.
The Fed has been increasing the interest rate on Treasuries and equity markets have been climbing since the beginning of 2017. The increase in asset prices often adds to the inflation parameter. The Fed’s preferred gauge of inflation was at 1.9% in the 12 months to January—only slightly below its target of 2%. Dallas Fed President Robert Kaplan mentioned that he could see inflation and employment nearing the bank’s goals.
TIPS and gold
Gold is famous as 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. However, it isn’t clear how well gold can protect investors against inflation.
The above graph compares gold prices with the inflation rate. To describe inflation in the US, 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 cues from US inflation numbers rather than other countries’ numbers.
Precious metals, gold, and silver could rise due to the increased inflation level. The increase in these metals can also be seen in funds like the iShares Gold Trust (IAU) and the iShares Silver Trust (SLV). On a year-to-date basis, these two funds already rose 8.8% and 14.2%, respectively.
The mining shares that also follow metals and could be a decent investment for precious metal investors include Barrick Gold (ABX), Alacer Gold (ASR), Harmony Gold (HMY), and Randgold Resources (GOLD).