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Could Rising Inflation Boost Gold?

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The Fed on inflation

There has been much hype about the expected movement of inflation and how the Federal Reserve would react to rising inflation. The new Federal Reserve chair, Jerome Powell, and his colleagues are willing to assume an inflation level as high as 2.5%. Currently, the inflation level is at 1.7%, and the Fed’s target level is 2%. For a long time, inflation has been under the target. However, with positive growth data filling the market, there is much optimism. However, some of the US central bankers have the view that aggressive policy tightening is unnecessary. The impact of an interest rate hike on gold is often negative, as gold is a non-yield bearer.

Gold is famously known as a hedge against inflation, so the higher inflation rises, the higher the demand for gold. Gold is a safety asset, and with price increases, investors will likely want to park their money in gold.

TIPS indicator

The above chart depicts the movement in gold and inflation over the past few years. It uses the US ten-year bond yield and Treasury Inflation-Protected Securities (TIPS) over the last five years. The graph depicts a possible upward trend for both.

The iShares Gold Trust (IAU) and the iShares Silver Trust ETF (SLV) have fallen 1.7% and 2%, respectively, on a five-day trailing basis, which may also be due to the anticipation of an upcoming hike in interest rates in 2018 given the rise in inflation.

The mining stocks that have followed gold in their directional price movements include Eldorado Gold (EGO), Wheaton Precious Metals (SLW), Agnico-Eagle Mines (AEM), and Gold Fields (GFI). These stocks have risen 6.9%, 1.9%, 10.1%, and 4.8%, respectively, as of February 23, 2018. Like precious metals, precious metal miners may rise due to a likely rise in inflation going forward.

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