Will Gold’s Inflation Hedge See It through 2018?


Feb. 9 2018, Updated 10:19 a.m. ET

Inflation picking up pace

The Federal Reserve has long been expecting inflation to pick up. Its targeted 2% inflation rate has been eluding it for more than five years, but the latest US jobs report indicates that inflation could finally get a boost.

President Trump’s stance on trade protectionism might also lead to higher inflation. The Trump administration has already imposed tariffs on products such as Canadian softwood lumber, imported washing machines, and solar panels.

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Wage increases to push inflation

Average hourly earnings rose 0.3% in January 2018. This figure was in-line with expectations and reflected an annual gain of 2.9%. The rise also marked the highest gain since mid-2009.

As the US economy reaches full employment, employers are finding it harder to find a skilled workforce. Intensifying the search could mean raising wages to attract talent, which could further support an increase in inflation. Walmart, for example, will raise entry-level wages for its employees to $11 per hour starting in February 2018. The company seeks to pass on some of the benefits of the US tax overhaul to its employees.

Inflation expectations and gold

The breakeven inflation rate—the difference between the nominal bond yield and the inflation-linked bond yield of the same maturity—has been rising steadily for the last six months. This rise indicates that investors expect inflation to pick up.

Rising inflation (TIP) should provide support to the Fed’s rate hike stance. While a rising interest rate is negative for gold, rising inflation is positive because gold is famously known as a hedge against inflation. Rising inflation could cause more investors to park their money in gold because it’s a haven asset.

The mining shares that have followed gold in their price movements include Alacer Gold (ASR), IAMGOLD (IAG), Buenaventura (BVN), and Gold Fields (GFI). These stocks are currently trading at $1.8, $5.3, $14.7, and $4.1, respectively. Like precious metals, precious metals miners may rise due to a probable rise in inflation going forward.


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