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All Eyes on Inflation—And Gold and Mining Stock Movements

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Gold and inflation

Much of the discussion surrounding another interest rate hike in December has been about how inflation numbers have remained low. The details of the latest FOMC (Federal Open Market Committee) minutes from the September meeting indicated that policymakers have had a prolonged debate about the prospects of a pick up in inflation.

But gold is used as a hedge against inflation. When prices rise, investors often invest in gold, and so often, the price of gold and the inflation rate have a direct relationship. However, it isn’t always clear how well gold can protect investors against inflation.

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The graph above compares gold prices with the inflation rate. To analyze inflation in the US, we use the yield spread, which measures the difference between the ten-year US bond yield and TIPS (Treasury Inflation-Protected Securities). Gold prices, to a large extent, take cues from US inflation numbers rather than from other countries’ numbers.

Precious metals rebounded

Precious metals (SLV) (GLD) had a good day on Thursday, October 12, despite the FOMC minutes from the September meeting and the rate hike indications therein. Gold, silver, platinum, and palladium rose 0.57%, 0.78%, 0.98%, and 1.5%, respectively.

FOMC officials saw the median federal funds rate at 1.4% at the end of 2017 and the median rate at 2.1% by the end of 2018. Overall, the minutes were not particularly dovish or hawkish, and markets are now pricing a 77% chance of a 25-basis-point hike in December.

The hike will likely be negative for precious metals as well as mining funds and stocks. The mining companies that have already shown year-to-date losses include Yamana Gold (AUY), Eldorado Gold (EGO), Harmony Gold (HMY), and Alacer Gold (ASR).

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