Metals markets continue to diverge this week, with copper and platinum adding to recent breakout gains while gold struggles to find footing.

During this week’s selloff, gold revisited its lows from last November. A support level exists at $1,750, but momentum selling could take prices down a bit further before technical gauges flash deeply oversold signals.

Turning to silver, the white metal continues to show relative strength versus gold, although prices haven’t actually moved much over the past few trading days.

Despite lackluster returns in most of the precious metals so far in 2021, inflation pressures are pointing upward.  On Wednesday, the Labor Department reported that U.S. wholesale prices surged by 1.3% in January.  

Rising costs for health care and energy led the bigger-than-expected increase.  It was the largest single month rise in producer prices in more than a decade.

That made inflation a hot topic on CNBC.

CNBC Anchor #1:                            This morning, we got a major warning sign         about inflation. Producer price is climbing more than expected in January.

CNBC Anchor #2:                            That question of, could there really one day actually be a return of inflation? Are we already pouring fuel on a pretty hot fire to begin with? Given people are getting back to sort of life, a lot of the country already is, but that return to normalcy, the spending that will come along with that, and then $1.9 trillion on top of that. And by the way, potentially an infrastructure bill following on that.

CNBC Market Commentator:         And the Fed, of course, is trying to engineer inflation, and has been trying to prepare investors for the idea that they are going to be tolerant of significantly higher inflation, for some time to come, to essentially counterbalance all this time we've spent under their target of 2%.

For now, Federal Reserve officials and most mainstream economists are brushing off the recent spike in prices as transitory. Some rebound was inevitable off the virus lockdown lows of last year.

But there is good reason to believe the inflation upswing has further to run. Another round of government stimulus may soon hit the economy. And of course, the recent rise in inflation will do nothing to deter the Fed from its easing agenda.

The question many investors may be rightly asking is why gold prices are sagging. After all, isn’t the monetary metal supposed to be an inflation hedge?

Of course, in the very long term, gold prices do reflect the inverse of currency depreciation. But gold also functions as a safe haven during times of stress in financial markets. Lately, markets have been fueled by extreme optimism toward an economic recovery – helping lift most industrial commodities in the process.

So far, the rise in inflation has been greeted enthusiastically by equity investors. It means deflation is no longer a threat.  

The gold trade tends to take off during times of fear. When investors begin to fear an overshoot of inflation, rising interest rates, or other threats to stock valuations, they will find precious metals more attractive to hold.

During the severe inflation and economic stagnation of the late 1970s, gold and silver vastly outperformed the stock market.

Of course, every economic cycle is different and unique. Today, gold and silver also face enormous price suppression campaigns by institutional short sellers. The concentrated short position in silver in particular exceeds that of just about any other commodity on the planet.

Yet we know the manipulated paper markets for precious metals don’t fully reflect the dynamics of physical supply and demand. Despite the spot price of silver being contained, demand for bullion products in recent weeks has gone through the roof.

It's been a mad scramble to keep inventory on the shelf – and the silver supply situation is highly tenuous. On top of that, recent weather issues in many areas of the country have slowed the transportation of metal.

Silver Eagles are currently scarce and carry elevated premiums. We are also now beginning to see some supply issues emerge in gold products, particularly fractional coins and bars.

Most other dealers are already wiped out of silver bars and rounds – or they are quoting ridiculously long lead times for fulfilling customer orders. But Money Metals Exchange has so far been able to keep all popular silver items in stock while shortening or eliminating delivery delays.

Meanwhile, we aren't seeing overall tightness on 1,000 oz silver bars so far – mainly some logistical issues involving the location of available supply. But again, the silver supply situation is tenuous.

If the outflow of silver through the retail minting channel continues at this rate for a few more weeks, that is likely to put real pressure on the availability of commercial bars as well as silver grain for minting.

We know that ultimately mints, jewelers, and industrial users of gold and silver require physical metal. Cash-settled futures contracts and shares of exchange-traded funds are no substitute for the real thing.

Time will tell whether furious retail buying of physical precious metals can help lift the lid on spot prices.

Mike Gleason is a Director with Money Metals Exchange, a national precious metals dealer with over 50,000 customers. Gleason is a hard money advocate and a strong proponent of personal liberty, limited government and the Austrian School of Economics. A graduate of the University of Florida, Gleason has extensive experience in management, sales and logistics as well as precious metals investing. He also puts his longtime broadcasting background to good use, hosting a weekly precious metals podcast since 2011, a program listened to by tens of thousands each week.