Gold was a big loser in 2013. Why it could be different this year.

I believe that you will soon see a noticeable and rather unwelcome uptick in inflation due to the rise in asset prices and the improving employment picture. The Federal Reserve has a dual mandate, to strive for full employment and to keep inflation in check. In order to help the nation recover from the deep recession of 2008, the Fed has used zero interest rates and quantitative easing, QE, as policy tools. Cheap money has driven up asset prices across real estate, the stock market, collectibles and art, and now it’s having an impact on real prices. The Fed has been reluctant to acknowledge this but to quick to reiterate their inflation fighting credentials.  Evidence is mounting that inflation is now impacting the broader economy. March CPI came in at twice expectations and PPI five times consensus. This was dismissed as a statistical fluke.

On its latest earnings call Hooker Furniture said rising leather costs forced it to raise prices last quarter. Yum! Brands talked about higher-than-expected commodity inflation, and therefore, higher menu prices. Lighting company Acuity Brands said prices of some of the commodities it uses are rising and some are not, but the Georgia-based company said it’s feeling the impact of higher health-care and wage costs.

All told, the management discussions this earnings season are providing a glimpse at what some analysts say the market may be quietly sniffing out—a higher rate of inflation.

“We’re not talking about high inflation. We’re just talking about higher inflation,” said Peter Boockvar, chief market analyst with the Lindsey Group. “You saw Chipotle talking about food costs, hurting their margins and they had to raise prices.”

“I think there is some inflation pressure around,” said Jack Ablin, CIO of BMO Private Bank. “There has been a lot of inflation pressure underneath the surface, not the least of which is coming from the job market … whether or not that translates to broad-based price increases still remains to be seen.” Both Netflix and Amazon recently raised prices. Another Big headline, gasoline prices have hit an 8-month high as we come into peak driving season.

While analysts say some level of inflation is healthy, rising inflation could pose a dilemma for the Federal Reserve as it winds down the stimulus from its bond-buying program. The Fed has targeted a 2 percent inflation rate as a threshold for raising short-term interest rates while also promising to keep rates low for a long time to come.

I’ve been trying to find ways to express this thought about an unanticipated rise in in the inflation rate. Most of the interest rate plays, derivatives, Eurodollar futures; inverse ETFs all have a rise in rates already priced in. That’s not to say that they won’t work eventually but these instruments have a time premium built in and it works against investors.   Gold has historically been positively correlated with inflation but it’s far from perfect.

Is it time to buy gold or gold miners?  I think it’s a favorable setup.  It wasn’t that long ago that it was gospel to have 5-10% of a conservative portfolio in gold.  The price of gold plunged 28% last year. Now that everyone has been punished for following prudent advice, it might just be the perfect time to reconsider.  Two ideas we have for this are the GLD ETF and the largest gold miner, Barrick Gold.  ABX is in talks with Newmont Mining to merge the two large miners into the world’s largest gold mining company.  The cost saving synergies are obvious plus some cutback in supply is possible when such competitors combine.  The latest news is that they both agree a combination makes sense but they hate each other’s guts.  Sounds like a well thought out marriage to me.