Wednesday, December 10, 2014

Invest in Gold for Inflation protection? Err... maybe not.

Look at the past 30 day charts of Gold and Silver from Kitco:

Over the past 30 days, Gold is up 7.04% and Silver is up 11.46%.

Inflation / Inflation expectations (I hate that E-word) must be BOOMING right?

That's the breakeven inflation rate for 10 year TIPS from the Fed themselves. Breakeven has dropped from 1.94 in November to 1.71 now. That's a 12% drop in inflation expectations. Watch it slowly collapse like a stack of cards. Kind of looks like the price of Oil, haha.

Yes, precious metals might offer somewhat of an inflation hedge, but this relationship is imperfect and is only usually seen over long stretches of time. There is constant overshooting and undershooting of the relationship that makes it far too unreliable for any "short term hedging against inflation". That's the lingo the cool kids like to say these days to justify their gold holdings.

Inflation is a derivative of the prices of a basket of goods over a period of time. Unless the basket of goods only consisted of precious metals, inflation and gold/silver prices will NEVER add up. Yes, it might track and follow, but probably with a lag and large margins of error. (Like what we are observing now)

Tiho's post about the recent action in Gold jolted me to write this article.

These fundamentally barbaric relics, useful only as a timeless shiny paperweight, has been living in a period of collapsing inflation expectations and a soaring USD for quite some time now.

If things sound so shitty and horrible for precious metals, why aren't they collapsing?

Now, that is a pretty good question to ask yourself. I would love to hear your views on this strange situation.

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