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.
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).
Among these four miners, AngloGold has the lowest correlation with gold so far this year, while Coeur Mining has the highest correlation YTD.
Today, IHS Markit published its purchasing managers' indexes or PMIs for May countries around the world.
Best Buy (BBY) reported better-than-expected earnings for the first quarter of fiscal 2020, which ended on May 4.
On May 23 at 12:46 PM EDT, Apple (AAPL) was trading at $179.12 with a 2.0% loss for the day.
The CBOE Volatility Index has been sitting at very low levels for most of 2019.
On May 23, CannTrust (CTST) was trading nearly 4.1% lower, while Cronos Group (CRON) fell 3.3%.
US equity markets are in the red today amid the escalation in the US-China trade war.