Ten-year break-even rate
Analysts believe the fluctuation in gold can be tracked through the OPEC (Organization of the Petroleum Exporting Countries) meetings. If these meetings lead to higher oil prices, there could be inflationary pressure across global economies. A failure by OPEC to agree on a production cut could send oil prices lower, which could also drag down gold.
For analysis purposes, we’ll use the US ten-year break-even inflation rate as a proxy for inflation. The rate is the spread between the ten-year Treasury yield and the TIPS (Treasury inflation-protected securities) yield.
The difference between yields on ten-year US Treasury notes and similar-maturity TIPS, which is a gauge of price expectations, rose to 1.9% on November 21, 2016.
Miners and funds could suffer
Since gold and crude oil are dollar-denominated commodities, they’re strongly linked. The U.S. Dollar Index, which measures the greenback against a basket of currencies, was steady at 101.2. The higher dollar and global growth prospects could negatively impact gold and gold-based funds such as the ETFS Physical Swiss Gold (SGOL) and the PowerShares DB Gold ETF (DGL).
Mining companies that could suffer from a rise in inflation and a fall in precious metals include Barrick Gold (ABX), Goldcorp (GG), New Gold (NGD), and Newmont Mining (NEM). Together, these four large mining stocks contribute about 22.0% of the fluctuations in the VanEck Vectors Gold Miners ETF (GDX).