It is necessary to clarify the perception that metals are a hedge against inflation. Are they really? The history of the last 20 years shows that gold (and silver), regardless of production, demand, and other elements, perform better with moderate inflation and declining rates.
What to expect for metals if inflation and yields rise?
“Gold’s ability to hedge against inflation has been… exaggerated…” an analyst at Blackrock recently argued. That of silver too, could I add. Investors channel their inflation concerns by trading the Treasury Note (10-YT). Let us compare for this article the linear behavior of gold (golden line) with that of the Note price. Do not confuse with the percentage performance.
- (10-YT) generated value from 2001 to 2011, as benchmark yield fell from 5.50% to 1.80%. Gold rose in mountain shape from $260 to $1,800; Silver (not shown here) climbed to its all-time high of $ 48 from $4.
- Between mid-2012 and the end of 2018, 10-YT accumulated losses due to the rate hike to 3.14% from 1.46%. Gold fell to $1,060 in that period, although it recovered to $1,200. Silver dropped to less than $14 with inconsistent ups and downs.
The big picture projects both prices followed the same direction. Certainly, there were periods when 10-YT tended lower while gold climbed, such as between 2015 and 2009, when the US economy grew, yields rose, and financial markets were exuberant.
From all-time highs to actual weakness
Look to this other chart from August 2020 to date.
- The slope of the 10-YT price started when gold peaked last year. Benchmark yield was then 0.52% and four months later almost doubled to 0.96%. Therefore, gold and silver prices weakened. Gold regained its luster in December but darkened in January when the price of 10-YT sharpened its bearish process. From there both lines dropped precipitously doing almost the same formation.
- So far in 2021, yields continued to rise reaching 1.60%. Gold accelerated losses linked to the falling prices of the Note. Silver was approaching the zone of highs, with ups and downs, but it lost steam by the pressure of gold. During the time span of this second graph, the yield went up more than triple, to 1.64%, leading to losses while gold left more than 18% on the way. It is illustrative that on March 9, 10, 11, the price of the Note rebounded, as did the metals.
Two opposing forces by 2021
Under this reality it is questionable to say that precious metals can be useful as hedge against the inflation the benchmark yield is anticipating. The lower the price of Note (rates up), the lower the price of gold. With different proportions and occasional distortions, of course. Good precious metal cycles occur in times of falling rates. Periods of low inflation and economic dynamism.
The macro situation presents two forces for 2021: inflationary potential and economic recovery. Metals can go down or stay horizontal with the first or gain value with the second. This may be what happens if the yield cap is not far from current levels.
Column by Arturo Rueda