Gold And Silver Still Inflation Hedges?

08 / 02
03 : 11

Gold And Silver Still Inflation Hedges? Gold And Silver Still Inflation Hedges?

Nasdaq 100 Market trends

There are some interesting and somewhat illogical macro games at play at present. The most perplexing is the relationship between the and yields and how it is confusing other sectors, namely and .

The result of yesterday’s FOMC seems to have been digested in different ways. The Fed—much like the last meeting a month ago—remains dovish. They do not intend to raise interest rates or taper until they see considerable improvement in the economy and namely unemployment rates.

The narrative a month ago was the same, yet in June the dollar rallied, and tanked amid declining yields, which continue to do. Yesterday put pressure on the dollar index, which at the time of writing had just touched the psychological 92 level (yet still up over 2% in 2021). So why are bond yields—the borrowing costs of those governments—falling again? 

Since the COVID crash, investors have piled into assets best placed to gain from a rebound. Tesla (NASDAQ:) has been a classic example of this. Most power house economies are fully open and stimulus is still being injected into the markets which has proven to be lucrative for banks and commodities. However, certain companies on the tech heavy are now starting to look very top heavy, so has the reflation trade run its course?

in the US continues to make worrying headlines and had caused bond yields to rise, however since April’s peak at roughly 1.77% on the , expectations of higher future inflation mean real yields are now well into negative figures and make investing in this sector pointless. (In fact, long term charts show yields have been in a major downtrend for years.)

All of this points to an upcoming stagflation environment and these indictors are an acknowledgement that we aren’t far away from this point in time.

The NASDAQ 100 has seen growth beyond any other index, as tech stocks proved themselves to be profitable shortly after the crash and are the more attractive choice against some traditional stocks that don’t perform as well. The bottom line is, however, the rebound is nearly over. Traders and investors alike are also monitoring closely the situation with the Delta variant as the slightest inference of another lockdown could cause market havoc.

The Fed will protect the stock market. Always. They cannot allow it to crash again. Every time there has been a wobble since the recovery started, a perfectly timed Fed intervention promising injections of cash has supported the markets. So the major worry across the financial markets is inflation, and has been since late 2020.

We are seeing what we all thought was going to play out—inflation is here to stay and it isn’t transitory. So where do you put your money in an inflationary environment where fiat currency is being debased at a rate of knots and we are close to a stock market wobble? Traditionally it has been hard assets and gold and silver have dominated during these times.

A $3trn US budget deficit, a total US debt of $28.5trn and a 32% rise in the since the pandemic began should have been enough fuel to launch gold to sky high levels, yet it hasn’t. So is gold, a fortress of sound money and for hundreds of years, a nailed on inflation hedge still holding this badge of honor? The answer is still yes, but to what extent we should know by close of 2021 and likely through 2022, and this is due to cycles.

Gold performs best in low interest rate environments, and when the economy runs out of steam. The interest rate scenario is still a hot topic of conversation. The UK and the US are the only major western nations that aren’t in negative interest rates. If the Fed raises rates, the results will lead to them reversing their decision, such will be the response in the markets and the debt the US is built on.

They know this. The bond market is by some distance larger than the stock market, and if declining yields are anything to go by, the bond market is likely to perform well in the short to medium term.

Cycles play out in all markets, whether it be seasonality or multi year repetition. Stage 1 "The crash" has played out in March 2020. Stage 2 "The Rebound" is nearly complete. Stage 3 is the "Slow Down" or "Stagflation" environment before we get to the final Stage 4. The last time Stage 3 occurred gold rallied 166% and silver 412%.

A lot of newbie investors got in too early in gold and silver and may have thrown in the towel by now; such is the expectancy of instant success with modern day traders spoilt in a 9 month run since March 22, 2020 when everything went up and fast. However, this investment requires patience and nerves of steel. 

So yes, they are still an inflation hedge, and we are very close to this cycle to commence. 

  • Mark
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