Heightened volatility in financial markets has led to a difficult trading environment. While the difficulty has weighed on investor returns, gold mining stocks, particularly McEwen Mining (MUX - Get Report) , have outperformed amid concerns of increasing inflation expectations.
While the global economy produced some fairly weak economic data in 2016, a falling U.S. dollar increased inflation expectations among investors. A visual representation of that belief is shown below through the indicator of iShares TIPS Bond (TIP - Get Report) over iShares Barclays 7-10 Year Treasury (IEF - Get Report) . When the indicator rises, it signals increasing inflation expectations.
The indicator has been steadily declining since 2011, and although it remains in a downtrend, it has spiked close to 3% the past few weeks. There are a few economic justifications for rising inflation expectations, which is pushing gold prices higher. First, the U.S. dollar is weakening as fears of the currency overshooting fair value have arisen. U.S. policymakers may not hike rates in 2016 as often as was previously thought due to global economic concerns. With the dollar falling, and negative interest rates becoming normal throughout the developed world, global investors have poured funds into gold.
The rise in gold has naturally benefitted gold producers as well. As gold increased, companies such as McEwen Mining have seen share prices rise as much as 40%. And while U.S. equity markets stabilized in February after a tumultuous January, further selling pressure could also push gold, and gold producers higher.
My general view of the market is bearish, but a lot of companies continue to hang around at elevated levels. In any scenario, aside from the global economy strongly recovering at an unforeseen pace, gold looks to continue its trend higher, benefitting owners of the commodity, as well as of producing firms.
**I am long MUX