Tug-of-War: How Inflation and Interest Rates Are Pulling Gold



Yields surge

The better the economic forecast for the US, the sooner we could see more interest rate hikes. The trajectory of inflation numbers is also moving north. The US government bond yields are rising, and an increase in interest rates is often negative for gold. Gold and other precious metals are non-yield-bearing assets. Thus, an increased interest rate could mean that the demand for gold could drop.

On the other hand, gold is also famously known as a hedge against inflation. The rise in inflation means that prices of assets could surge. To protect against such a surge, gold-buying could rise.

Tug-of-war on gold

Thus, there could be a possibility that interest rates and inflation could play a tug-of-war on gold (IAU) (SLV). Rising inflation could cause gold to rise and rising interest rates could cause gold prices to drop. Further, the rise in oil could support an increase in inflation. Rising wages and increased growth forecast could also be supportive for inflation numbers.

The chart above compares the price movement of gold alongside the ten-year US government bond yield and TIPS (Treasury inflation-protected securities) (TIPS). The graph depicts an upward trend for both in the last quarter. 

Some of the miners that rose on Monday along with gold prices are Coeur Mining (CDE), Hecla Mining (HL), Pan American Silver (PAAS), and Gold Fields (GFI). These stocks were up 2.3%, 2.8%, 1.3%, and 2.2%, respectively.

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