Gold Silver Reports – The Metal’s Recent Rise isn’t About Inflation Rising or Cryptocurrencies Falling — Gold has been on a tear of late, climbing more than $100 per troy ounce in the last six weeks, briefly exceeding the 2017 high of $1,359 in the process.
Coincidental with that have been three important market moves: the weakening of the U.S. dollar, sharp downturns in cryptocurrencies and a rise in bond yields. Simply put, a weak dollar tends to drive commodities prices upwards, as is evident in the price of oil. Only by looking at the performance of gold in other currencies can a discernible trend be spotted. And there isn’t one.
Gold is seen as the perennial hedge against inflation and all the worries of the world. While central banks can hoard it, it is — so far — beyond their abilities to mine more of it.
The recent sharp price drop in cryptocurrencies may highlight the timeless allure of safety that gold has, but the crypto pond is still too small to be relevant. More fundamental might be the recent uplift in bond yields. Five-year U.S. Treasuries have risen in yield from 1.63 percent in the middle of 2017 to 2.45 percent now. But growing inflation expectations haven’t been the main driver of that rally.
The Federal Reserve’s five-year forward breakeven inflation rate index has risen 30 basis points over the same time-frame, a mere third of the upward move in yields. The increase is due more to the Fed’s preemptive action of repeatedly hiking the Fed funds rate, than to concern about inflation.
Gold is not far below the highs of 2016 around $1,400. A clear break through that ceiling might point to a return to the levels seen during 2010-13 as the sovereign debt crisis raged. Absent further signs that inflation is gaining traction, there is little fundamentally to suggest the move would be sustained.
The weakness of the dollar doesn’t make a whole lot of sense. The U.S. economy is widely predicted to continue to outperform its developed world peers — and the Fed is set to hike several times this year while other central banks stay on hold. The recent strength in gold is largely a dollar-related phenomenon. Their fate is tied.