Skip directly to Accessibility Notice

Gold Heats Up on Warming Inflation

June 11, 2021


Gold Moves on Inflation (Finally)

There has been ample talk and plenty of anecdotal evidence of inflation this year, none of which has seemed to elicit much of a response from gold…until this month, that is. The first inflation-related report was released on May 12 from the Bureau of Labor and Statistics (BLS)—surprising the market with a 4.2% annual increase in the consumer price index (CPI).Gold fell that day, as the metal continued to take a skeptical view on inflation. However, the following day brought a 6.2% surprise in the BLS’s producer price index (PPI)and gold resumed its march to $1,900 per ounce. On May 14, the University of Michigan’s one-year consumer inflation expectations spiked to 4.6%. Then, on May 25, the Conference Board’s twelve month inflation expectations also soared to 6.5%. Finally, on May 28, the U.S. Federal Reserve’s (Fed’s) preferred inflation gauge, the core Personal Consumption Expenditures (PCE)price index, climbed to 3.1%. We assume economists have baked the pandemic base effect into their forecasts. Yet all of these measures beat analysts’ expectations, which suggests inflation maybe becoming more of a problem.

Being that May was basically the first month in 2021 that excessive inflation was actually reported in primary economic indicators, we believe that gold responded relatively nicely with an overall $137.74 (7.6%) gain to end the month at $1,906.87 per ounce. Gold stocks continued to lead gold out of its six-month correction with the NYSE Arca Gold Miners Index(GDMNTR) and the MVIS Global Junior Gold Miners Index(MVGDXJTR) advancing 14.3% and 14.8%, respectively.

It’s Been Awhile

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. The Fed’s 5-year forward breakeven rate is at seven year highs while 5-year inflation swaps and treasury inflation protected securities (TIPS) breakeven rates are both at levels last seen in 2008.

The Fed, as well as many economists, believe that inflationary pressures will be transitory, brought on by micro- and macro-economic responses to the pandemic. Inflation typically sees a temporary surge as the economy emerges from recession. However, there is mounting evidence that the current environment is less like the one that followed the Global Financial Crisis (GFC) and more like the seventies.

The GFC was a crisis of banking failures and bailouts in which the financial system could not function normally and the Fed was authorized to pay interest on bank reserves for the first time. Unlike the GFC, the banks have remained healthy throughout the pandemic crisis and the financial system has thrived, thanks in part to the Fed’s rapid and massive response. In addition, the government wrote checks to the majority of American families and the money supply has increased as never before outside of World War ll. All of this liquidity has been sloshing around the economy creating financial bubbles. Now it is beginning to create wage and price inflation, and the Fed is loath to do anything about it.

The inflationary regime of the seventies had its roots in the Great Society launched by President Johnson in 1964 – 65. Like today’s Biden agenda, Great Society programs created new major spending on education, medical care, urban problems, poverty and transportation. According to Wikipedia, the main goal was the total elimination of poverty and racial injustice. When two oil price shocks occurred in the seventies, the high price of oil, combined with government spending on social programs and the Vietnam War, drove inflation to double digits.

What’s Different These Days?

Oil prices don’t have near the impact on today’s economy that they did in the seventies. However, prices today are rising across a much broader range, from oil to metals, lumber and agricultural commodities. Producers have been less willing to commit capital to increase production in this cycle, while the transition to a green economy is beginning to lift demand and/or costs to levels that may require prices to rise further. Many CEO’s from manufacturing to consumer goods companies speak of rising costs and/or expectations to raise prices this year and next.

In addition to commodities, here are other areas that suggest higher inflation could become more permanent:

  • M2 money supply – the measurement of money supply including cash and checking deposits, as well as savings deposits, money market securities, mutual funds and other time deposits – is growing in the 20-30% range, twice the rate of peak money growth in the seventies.
  • The housing shortage appears to be a systemic, lasting problem caused by the scarcity of land, over-regulation, and a shortage of labor.
  • If the U.S. dollar weakness seen in 2020 (and again in the last two months) continues, imports will become more costly.
  • The offshoring of cheap labor driven mainly by the industrialization of China has stalled and globalization may be reversing.
  • Job openings surged in March to a record high, yet April nonfarm payrolls rose at just 27% of expectations. Many employers are having trouble finding qualified workers.

The Fed’s preferred inflation indicator (the PCE, as noted earlier) rose 3.1% in April, its fastest pace since 1992. The Fed claims it has the tools to deal with unwanted inflation, but will it use those tools? The Fed raised rates to quell the inflation of the seventies, at the cost of a severe recession in 1981. Back then, the debt/gross domestic product (GDP) ratio was around 25%. Now, with a debt/GDP of around 100%, a similar rise in rates would likely increase debt service costs to ruinous levels. Heavy debt loads tend to dampen economic activity. While former Fed Chair Paul Volker courageously faced a formidable challenge in the seventies, whoever is appointed Fed Chairman in February may face an impossible challenge in a modern Fed that might be reluctant to do anything that causes economic or social hardship.

Facing The Music

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.

Gold Highly Correlated With Inflation Above 3%

Gold Highly Correlated With Inflation Above 3%

Source: VanEck, Scotiabank. Data as of April 2021.

Related Insights

Gold Investing Webinar

January 25, 2022

Gold Investing Blog

January 13, 2022

Gold Investing Blog

January 10, 2022


All company, sector, and sub-industry weightings as of May 31, 2021 unless otherwise noted.

Nothing in this content should be considered a solicitation to buy or an offer to sell shares of any investment in any jurisdiction where the offer or solicitation would be unlawful under the securities laws of such jurisdiction, nor is it intended as investment, tax, financial, or legal advice. Investors should seek such professional advice for their particular situation and jurisdiction.

1The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.2The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output. The prices included in the PPI are from the first commercial transaction for many products and some services.3The Personal Consumption Expenditures Price Index (PCE) is a measure of the prices that people living in the United States, or those buying on their behalf, pay for goods and services. The PCE price index is known for capturing inflation (or deflation) across a wide range of consumer expenses and reflecting changes in consumer behavior.4NYSE Arca Gold Miners Index (GDMNTR) is a modified market capitalization-weighted index comprised of publicly traded companies involved primarily in the mining for gold.5MVIS Global Junior Gold Miners Index (MVGDXJTR) is a rules-based, modified market capitalization-weighted, float-adjusted index comprised of a global universe of publicly traded small- and medium-capitalization companies that generate at least 50% of their revenues from gold and/or silver mining, hold real property that has the potential to produce at least 50% of the company’s revenue from gold or silver mining when developed, or primarily invest in gold or silver.

Any indices listed are unmanaged indices and include the reinvestment of all dividends, but do not reflect the payment of transaction costs, advisory fees or expenses that are associated with an investment in a Fund. Certain indices may take into account withholding taxes. An index’s performance is not illustrative of a Fund’s performance. Indices are not securities in which investments can be made.

NYSE Arca Gold Miners Index is a service mark of ICE Data Indices, LLC or its affiliates (“ICE Data”) and has been licensed for use by VanEck Vectors ETF Trust (the “Trust”) in connection with VanEck Vectors Gold Miners ETF (the “Fund”). Neither the Trust nor the Fund is sponsored, endorsed, sold or promoted by ICE Data. ICE Data makes no representations or warranties regarding the Trust or the Fund or the ability of the NYSE Arca Gold Miners Index to track general stock market performance.


MVIS Global Junior Gold Miners Index (the “Index”) is the exclusive property of MV Index Solutions GmbH (a wholly owned subsidiary of Van Eck Associates Corporation), which has contracted with Solactive AG to maintain and calculate the Index. Solactive AG uses its best efforts to ensure that the Index is calculated correctly. Irrespective of its obligations towards MV Index Solutions GmbH, Solactive AG has no obligation to point out errors in the Index to third parties. The VanEck Vectors Junior Gold Miners ETF (the “Fund”) is not sponsored, endorsed, sold or promoted by MV Index Solutions GmbH and MV Index Solutions GmbH makes no representation regarding the advisability of investing in the Fund.

Please note that the information herein represents the opinion of the author, but not necessarily those of VanEck, and this opinion may change at any time and from time to time. Non-VanEck proprietary information contained herein has been obtained from sources believed to be reliable, but not guaranteed. Not intended to be a forecast of future events, a guarantee of future results or investment advice. Historical performance is not indicative of future results. Current data may differ from data quoted. Any graphs shown herein are for illustrative purposes only. No part of this material may be reproduced in any form, or referred to in any other publication, without express written permission of VanEck.

About VanEck International Investors Gold Fund: You can lose money by investing in the Fund. Any investment in the Fund should be part of an overall investment program, not a complete program. The Fund is subject to the risks associated with concentrating its assets in the gold industry, which can be significantly affected by international economic, monetary and political developments. The Fund’s overall portfolio may decline in value due to developments specific to the gold industry. The Fund’s investments in foreign securities involve risks related to adverse political and economic developments unique to a country or a region, currency fluctuations or controls, and the possibility of arbitrary action by foreign governments, or political, economic or social instability. The Fund is subject to risks associated with investments in Canadian issuers, commodities and commodity-linked derivatives, commodities and commodity-linked derivatives tax, gold-mining industry, derivatives, emerging market securities, foreign currency transactions, foreign securities, other investment companies, management, market, non-diversification, operational, regulatory, small- and medium-capitalization companies and subsidiary risks.

About VanEck Vectors® Gold Miners ETF (GDX®) and VanEck Vectors® Junior Gold Miners ETF (GDXJ®): An investment in the Funds may be subject to risks which include, among others, investing in gold and silver mining companies, Canadian issuers, foreign securities, foreign currency, depositary receipts, small- and medium-capitalization companies, equity securities, market, operational, index tracking, authorized participant concentration, no guarantee of active trading market, trading issues, passive management risk, fund shares trading, premium/discount risk and liquidity of fund shares, non-diversified and concentration risks, all of which may adversely affect the Funds. Foreign investments are subject to risks, which include changes in economic and political conditions, foreign currency fluctuations, changes in foreign regulations, and changes in currency exchange rates which may negatively impact the Funds’ return. Small- and medium-capitalization companies may be subject to elevated risks. The Funds’ assets may be concentrated in a particular sector and may be subject to more risk than investments in a diverse group of sectors.

Diversification does not assure a profit or protect against loss.

Please call 800.826.2333 or visit for performance information current to the most recent month end and for a free prospectus and summary prospectus. An investor should consider a Fund’s investment objective, risks, charges and expenses carefully before investing. The prospectus and summary prospectus contain this as well as other information. Please read them carefully before investing.

© 2021 VanEck

1 - 3 of 3