Key Points
Precious metals staged quite an impressive price rebound on Wednesday. As often happens in such situations, the prices of stocks tied to the commodities rallied in sympathy. That was excellent news for Wheaton Precious Metals (NYSE: WPM) investors, as their stock rose by more than 11% across that trading session.
Treasury doubles down
This was the dictionary definition of a top-down rally. That’s because it was prompted by the Federal government (specifically the Treasury Department) announcing that it would at least double its long-term bond repurchases to $4 billion or more per operation from the current $2 billion.
This, understandably, drove bond prices higher; as prices of such assets rise, yields decline. And since U.S. bonds are a global financial benchmark due to the reliability of our government in paying them back, those yields are indicative worldwide.
When they drop, all things being equal, demand for riskier assets (such as cryptocurrencies) or non-yielding investments (precious metals) tends to rise. This drives up prices for these instruments, and plays — like the royalty “streaming” company Wheaton Precious Metals — that are associated with them.
Another factor in the sudden, sharp rally in gold, silver, and related assets was that their prices had generally been slumping since they notched all-time highs earlier this year.
Caution warranted?
Given how sharp and news-dependent that rally was, I wouldn’t count on it to last very long.
Inflation remains a concern for many monetary policymakers, despite encouraging price news lately, and there’s a decent chance the Federal Reserve will raise interest rates in the near future. Given that, I’d be cautious with gold and silver assets, and I’d be cautious with Wheaton Precious Metals stock.
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Eric Volkman has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
