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How Inflationary Pressure Played on Gold Last Week

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Inflationary pressure

Among the core indicators playing precious metal prices is the rise in US inflation, which is currently at 2.2%—almost at growth of 1% compared to the start of 2016. The increase in economic numbers has been elemental to inflation. The rise in oil prices also has a substantial effect on rising inflation. Oil is a significant contributor to inflation numbers.

Gold is famously known as a hedge against inflation. During increasing inflationary pressure, investors often see gold as a relief. The rise in inflation means asset prices could surge. To protect against such a surge, gold buying could rise.

TIPS and gold

The chart above shows the price movement for gold alongside the ten-year US government bond yield and TIPS (Treasury inflation-protected securities)(TIPS). The graph depicts an upward trend for both last quarter. According to year-end projections, the US inflation rate could rise to 2.5%–3%, which could be harmful to precious metals. 

Rising inflationary pressure is often detrimental to the US dollar. Once again, a drop in the dollar causes precious metals (IAU)(SLV) to surge, as they’re dollar-based assets. Rising wages and increased growth forecasts could also support inflation numbers.

Some of the mining stocks that also increased along with gold prices earlier this week include B2Gold Corp. (BTG), Royal Gold (RGLD), Goldcorp (GG), and New Gold (NGD).  These stocks were up 7.4%, 5%, 9.4%, and 2.3%, respectively, on a five-day trailing basis as of February 20.

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