Market measures of five-year inflation expectations are currently in the 2.5% to 3.0% range, which is in line with past post-recession levels. However, it has been many years since investors have had such a strong outlook for inflation.
This is the first time in over 30 years that inflation has become a credible risk. Most working-age people have no experience or memory of an inflationary cycle, when the relentless rise in prices causes purchasing power to decline. Wage increases effectively evaporate year after year. While we won’t know until 2022 whether the recent rise is a temporary aberration of the pandemic, it is not too early to think about possible changes in spending patterns and investing.
Gold reacts to inflation when it becomes excessive and/or out of control. The chart shows that below an annual CPI change of 3%, there is no correlation between gold and the CPI. The correlation turns mostly positive above 3% and above 4% a more linear trend is established. In May gold prices may have crossed a higher threshold if inflation is indeed here to stay.
MVIS Global Junior Gold Miners Index
31/05/2020-31/05/2021
Source: MV Index Solutions. All values are rebased to 1,000. Data as of 31 May 2021.
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