Gold and silver markets are exhibiting more signs of breaking out into a rally. 

On Thursday, bond yields pulled back sharply. That helped fuel a new record in the Dow Jones Industrials. But the precious metals sector was an outperformer on the day, with mining stocks leading gold prices to a fresh multi-week high.

With the exception of palladium, precious metals markets have lagged behind other asset classes in 2021. That may be in the process of changing here in the second quarter. 

Meanwhile, industrial commodities, cryptocurrencies, equities, and housing continue to gain ground.  They are benefiting from inflationary policies being enacted by the Joe Biden administration in conjunction with the Federal Reserve. 

Of course, rising inflation pressures are ultimately bullish for gold and silver markets. But for the time being artificial economic stimulus is combining with reopening optimism to jolt the more economically sensitive sectors.

In the wake of $1,400 stimulus checks sent to millions of Americans, consumer spending surged. The Commerce Department reported Thursday that retail sales spiked 9.8% in March. 

Home prices are also surging. The median sales price of existing homes is up 16% over the past 12 months. That’s the fastest pace in 15 years.  Housing is becoming more expensive in large part due to massive increases in the costs of lumber and other building materials.

Inflation is also beginning to show up at the gas pump and grocery store. With the Fed vowing to target a higher official inflation rate, more price pain is likely coming.

In the early stages of inflationary cycles, rising currency supply is typically greeted with celebration. Cash-strapped consumers and businesses see an immediate windfall. Rising demand for goods and services stimulates business revenues and lifts stock values on Wall Street.

First comes the gain, then the pain. 

History suggests that periods of rising inflation are not especially kind to investors.  And the current investing environment is wrought with peril. 

Yields on cash savings and money markets are near zero thanks to the Fed.  Bonds yield a bit more, but a 10-year Treasury coupon of about 1.5% is still well below the central bank’s own inflation objective. Fed chairman Jerome Powell wants to see inflation run above 2% over a sustained timeframe. And the official measure of consumer price increases tends to understate the real-world effects.

What all this means is that holders of U.S. dollars and dollar-denominated IOUs can look forward to real losses on their holdings.

As for stocks, valuations are currently sky high. A rising inflation rate will tend to eat into risk premiums and force price to earnings ratios to adjust downward.  

When investors begin to feel the pain of underperforming paper assets, they may seek gains in tangible assets. 

Gold and silver are classic safe havens in an environment of rising inflation and other risks. They show virtually no correlation with conventional financial assets, making them ideal portfolio diversifiers.

Trying to pick bottoms or time the market is difficult. It can also be disastrous if you’re on the wrong side of the market ahead of a big move. 

Gold and silver prices could move sharply at any time for reasons that nobody would predict. They could also move sideways first for a long while, frustrating those with short time horizons.