Precious Metals and the Matter of Inflation

“Everything is inflating. That’s driven by a once in a moment history. People are emerging from a pandemic with the endless spirit that comes from being locked up," billionaire Bill Ackerman said in an interview with Markets Insider.

The recent April Consumer Price Index came out at 4.3% instead the expected 2% range has many concerned, as has recent wage growth.

Of course, inflation is notoriously hard to predict, and the unique situation brought about by the COVID crisis further complicates the matter. The pandemic shrank the economy, and what we’re seeing in the market could simply be the byproduct of reflation.

Though the Fed has indicated that the current inflation surge is transitory, not everyone agrees.

The precious metal space has a unique relationship with inflation.

“If a high inflation scenario takes hold, gold has more positive convexity or right-tail upside than any single liquid asset,” Sprott Market Strategist Paul Wong said in a monthly report.

Indeed, in May, gold prices rose $137.74, to close out the month up 7.79% at $1,906.87/oz.

Though data is thin on precious metals as a predictor of inflation, there is ample historical evidence that precious metals can retain value in times of high of rising inflation.

After all, unlike dollars, you can’t print gold or silver. There’s always going to be a limited supply of it available.

Additionally, precious metals tend to retain their value even if the dollar weakens – and the dollar is currently weakening.

“Look at risk reversal skews. It just shows that sentiment for the dollar has weakened dramatically… We would need to see increasing risk aversion or a sharp move higher in US treasury yields or real yields in general for the dollar to rally, and we don’t see any of that at the moment,” TD Securities Mitul Kotecha said in an interview with Bloomberg.

Silver, in particular, has industrial value that makes it a critical component in electronics and emerging technology, which in turn can help add a floor to prices. Silver’s price currently sits at $28.07/oz and is projected to hit $40/oz.

Wong’s report says of the metal: “fundamental supply and demand are overwhelmingly bullish [for silver] as investment and industrial demand, especially in clean technology, far outstrip supply for the foreseeable future.”

While gold doesn’t have the same industrial cachet, it does have surprising uses in the modern world and holds tremendous symbolic value to go along with a long history as universally valuable resource.

Investors can access physical silver through the Sprott Physical Silver Trust (PSLV ) which is a closed-end trust that holds LGD silver bars.

Meanwhile, the Sprott Physical Gold Trust PHYS holds gold bullion.

Mining companies  tend to do well during inflation, because as demand for precious metals spike, their profits increase.

Sprott offers two actively managed precious metals mining ETFs: the Sprott Gold Miners ETF (SGDM ), which tracks gold majors, and the Sprott Junior Gold Miners ETF (SGDJ ) tracks junior gold miners.

For more news, information, and strategy, visit the Gold & Silver Investing Channel.