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Betting on inflation is paying off big for investors

The specter of rising inflation is helping power assets like gold, silver and Treasury Inflation-Protected Securities (TIPS) to strong returns with record demand this year.

The big picture: Investors continue to pack in even as inflation metrics like the consumer price index (CPI) and personal consumption expenditure (PCE) index have remained anchored.

What's happening: The Fed has added close to $3 trillion to its balance sheet since March and Congress passed the $2.2 trillion CARES Act, leading to an unprecedented increase in U.S. money supply.

  • The stimulus efforts have helped push stock and bond markets higher, but in recent months the gains of precious metals have far outpaced them.
  • In July, the value of gold and silver rose by 11% and 33%, respectively, with silver up 62% over the last three months.
  • The dollar suffered its worst month in a decade in July, which boosts the value of commodities priced in dollars.

By the numbers: In the first six months of the year, total investment demand for gold reached a record value of more than $60 billion even as demand for jewelry, bars and coins fell, the World Gold Council announced Thursday.

  • Global net inflows to gold ETFs reached $39.5 billion in the first half of the year, "significantly above the highest level of annual inflows," WGC noted, both in tonnage terms (646 trillion in 2009) and dollar value ($23 billion in 2016).
  • "To put this strength of demand into context, H1 inflows are also significantly higher than the multi-decade record level of central bank net purchases seen in 2018 and 2019."
  • Global holdings of silver rose 10% in the first half of the year and silver ETF holdings surpassed the previous record for a full year, according to the Silver Institute.

TIPS have been so well bid that yields, which move inversely to prices, have fallen to historic lows on some maturities. The 10-year TIPS yield has recently dropped to almost -1%, Reuters reported last week.

  • TIPS funds have seen net positive inflows for six straight weeks, including the two best weekly net inflows on record (the weeks ending June 24 and July 1), according to Refinitiv Lipper.

What to watch: Fed chair Jerome Powell has said the U.S. central bank is not even "thinking about thinking about thinking about" raising U.S. interest rates, and WSJ reported Sunday that the Fed is considering an overhaul of its long-term strategy of raising rates early to head off rising inflation.

  • That could mean the central bank pulls back on its commitment to keeping rates in check right as inflation returns.

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