Tepid Inflation Weighs On Precious Metals

Includes: DBP, FXF, UUP
by: Andrew Sachais

2013 has enlightened investors to the fact that growth is going to remain tepid and inflation expectations will stay below central bank targets for the foreseeable future. China, Europe, and the U.S. have all projected lower growth numbers, which promotes increased central bank support, and decreased inflation risk.

U.S. TIPS funds have seen heavy outflows and traditional inflation hedged assets are experiencing selloffs. Precious metals have declined to multi-year lows due to their inflation protected attributes and U.S. dollar strength.

The chart below is of PowerShares DB Precious Metals (NYSE:DBP) over CurrencyShares Swiss Franc Trust (NYSE:FXF). The franc is a traditional safe-haven currency that produces low volatility and allows for assets priced in it to show their true strength.

Precious metals priced in the franc have consolidated since late 2011 as central banks have provided liquidity across world markets which produced volatility in global currencies. Precious metals consolidated, albeit at elevated levels, signaling that inflation pressures where still a concern.

As growth has waned and inflation has become less of a concern, this pair has pulled back and looks to now be trending downwards.

Another reason for precious metal weakness as of late has to do with the increasing strength of the U.S. dollar.

Ben Bernanke came out last week and was very explicit with his outlook on the future of monetary stimulus. His comments came off as very hawkish and concrete, which became a catalyst for U.S dollar strength.

The chart below is of PowerShares DB US Dollar Index Bullish (NYSEARCA:UUP) over CurrencyShares Swiss Franc Trust. This chart measures the relative strength of the dollar versus the safe-haven franc.

The U.S. dollar had been trending lower since early 2009 because market participants knew the Fed had a do whatever it takes attitude towards economic recovery. The dollar fell sharply, but has reversed course in 2013.

Investors now believe that the Fed is more hawkish than other central banks across the world such as the ECB and BOJ. As the U.S. economic picture improves and central banks across the world continue to provide stimulus, the U.S. dollar should elevate to pre-crisis levels.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.