First the Gain, Then the Pain…

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by Mike Gleason, Money Metals:

Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

Gold and silver markets are exhibiting more signs of breaking out into a rally.

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

As of this Friday recording the upward momentum has continued and gold spot sports a weekly gain of 2.0% to come in at $1,786 an ounce. Silver is up 3.2% since last Friday’s close to trade at $26.23 per ounce. Platinum is unchanged for the week to trade at $1,223. And finally, palladium is trading up near a record high at $2,807 an ounce after advancing 4.7% so far this week.

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With the exception of palladium, precious metals markets have lagged behind other asset classes in 2021. That may be in the process of changing here in the second quarter.

Meanwhile, industrial commodities, cryptocurrencies, equities, and housing continue to gain ground. They are benefiting from inflationary policies being enacted by the Joe Biden administration in conjunction with the Federal Reserve.

Of course, rising inflation pressures are ultimately bullish for gold and silver markets. But for the time being 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. The Commerce Department reported Thursday that retail sales spiked 9.8% in March.

Home prices are also surging. The median sales price of existing homes is up 16% over the past 12 months. That’s the fastest pace in 15 years. Housing is becoming more expensive in large part due to massive increases in the costs of lumber and other building materials.

Inflation is also 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.

In the early stages of inflationary cycles, rising currency supply is typically greeted with celebration. Cash-strapped consumers and businesses see an immediate windfall. Rising demand for goods and services stimulates business revenues and lifts stock values on Wall Street.

First comes the gain, then the pain.

History suggests that periods of rising inflation are not especially kind to investors. And the current investing environment is wrought with peril.

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

What all this means is that holders of U.S. dollars and dollar-denominated IOUs can look forward to real losses on their holdings.

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