Gold peaked in August and is about 15% below its high. Silver also peaked in August and is more than 20% below its high. These trends have some investors wondering if metals still serve as inflation hedges.
It’s a reasonable question. Gold and silver have fulfilled that role for centuries. While they are below their highs, they are still assets that protect against catastrophic risks. Both gold and silver are more than 20% above their pre-pandemic prices.
Rallies driven by the pandemic may have pushed the metals to levels that were higher than justified based on inflation. As the global economy recovered faster than expected from the pandemic, sell-offs followed in both metals. Their prices now reflect inflation without the premium for the unanticipated pandemic risks.
Industrial Metals Are Bullish in the Post-Pandemic Economy
Other metal prices also reflect the impact of inflation. Below is a chart showing that aluminum, nickel, copper and lead are all in bull markets.
Non-Precious Metal Prices Over the Pandemic
These are industrial metals and are trading higher because demand exceeds supply in the rapidly expanding economic environment. And supply levels for these metals change slowly. It can take years to develop new mines, and existing mines are often less productive as they age, and ore deposits become less accessible.
In addition to supply constraints, processing channels for metals are under stress. New regulations tend to make refining more expensive and less adaptable to changes in market demands. While a refiner may want to expand to meet demand, permitting process can make rapid changes impossible.
The chart above shows that inflation is a concern, and the metals market is a hedge against inflation. Because the market requires time to adapt to changes in demand, industrial metals are likely to stay bullish for months or possibly years.
Industrial metals aren’t glamorous investments like tech stocks, but they could be more profitable investments in the future.
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Michael Carr is the editor of True Options Masters, One Trade, Peak Velocity Trader and Precision Profits. He teaches technical analysis and quantitative technical analysis at the New York Institute of Finance. Follow him on Twitter @MichaelCarrGuru.