We recently wrote that the clearest driver for the gold price, according to the view of the research team at Secular Investor, has been inflation expectation. That becomes clear when looking at the correlation between the gold price and TIPS (inflation-protected US Treasury bonds), an instrument that reflects real yields for maturities ranging from 5 to 30 years. Both have been moving almost perfectly in sync with each other.
The First Chart Says It All
The TIPS / gold price chart, after being closely correlated for more than a decade, has created a divergence after the precious metals collapse in 2013. Since then, inflation expectations have been on the rise before stagnating into the second half of 2014. The first chart says it all.
In other words, the divergence between inflation expectations and the gold price has to be resolved, in either direction.
Given all that, it is encouraging for gold bulls to see the next two trends.
The first one is the inflation funds inflow into bonds and ETF’s as seen on the next chart. Inflows in inflation related bond funds has reached a peak in 2015 when compared to the last 8 years.
The second trend shows the 5-year breakeven inflation rate which is the difference between the 5-Year Treasury Constant Maturity Rate and the yield on an inflation protected security with 5-years remaining to maturity. Clearly, the trend is up after it bottomed in the first weeks of 2015.
The issue with these measures and viewpoints is that one should not look at it from a short term perspective. In other words, these are not short term indicators nor timing tools; they rather serve as bigger picture trends.
Although it does not “feel” that way, there certainly is a case to be made for rising inflation. If that scenario would come true, then precious metals will be the place to be, along with some other commodity types.