Inflation: First the Gain, Then the Pain…

The comments below are an edited and abridged synopsis of an article by Mike Gleason

Last week, bond yields pulled back sharply. That helped fuel a new record in the Dow. But the precious metals sector was an outperformer, with mining stocks leading gold prices to a new multi-week high.

Inflation: First the Gain, Then the Pain… | BullionBuzz | Nick's Top Six
Pain or Gain concept, Hand flip wood cube change the word

Industrial commodities, cryptocurrencies, equities and housing continue to gain ground. They are benefiting from inflationary policies being enacted by the Biden administration in conjunction with the Fed.

Of course, rising inflation pressures are ultimately bullish for gold and silver. But for now, artificial economic stimulus is combining with reopening optimism to jolt the more economically sensitive sectors.

In the wake of $1,400 stimulus checks sent to millions of Americans, consumer spending surged. Retail sales spiked 9.8% in March. Home prices also surged.

Inflation, not particularly kind to investors, is beginning to show up at the gas pump and grocery store. With the Fed vowing to target a higher official inflation rate, more price pain is likely coming.

Yields on cash savings and money markets are near zero. Bonds yield a bit more, but a 10-year Treasury of about 1.5% is still well below the Fed’s own inflation objective. Fed Chair Jerome Powell wants to see inflation above 2% over a sustained timeframe. And the official measure of consumer price increases tends to understate the real-world effects.

What this means is that holders of US dollars and dollar-denominated IOUs can expect real losses on their holdings.

As for stocks, valuations are currently sky high. A rising inflation rate will tend to eat into risk premiums and force price to earnings ratios to adjust downward. 

When investors begin to feel the pain of underperforming paper assets, they may seek gains in tangible assets.

Gold and silver are classic safe havens in an environment of rising inflation and other risks. They show virtually no correlation with conventional financial assets, making them ideal portfolio diversifiers.

Trying to pick bottoms or time the market is difficult. It can also be disastrous if you’re on the wrong side of the market ahead of a big move. Gold and silver could move sharply at any time for reasons that nobody would predict.

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