The coronavirus and post-coronavirus period have led to some economic circumstances that were unimaginable just a couple of years ago. One of these has to be the poor performance of precious metals with gold (GLD  ) and silver (SLV  ) down by 19% and 25%, respectively since last August.

In contrast, the last 13 months have featured incredible gains for other commodities like oil and steel being up 96% and 35% respectively. Stocks have risen especially as the earnings outlook has significantly improved with expectations of $200 per share in EPS for the S&P 500 (SPY  ) which would be a record.

The irony is that it's hard to imagine circumstances that could be more favorable for gold or silver. We have had record deficits with the 2020 deficit at $3.9 trillion, and 2021's estimated to come in at $3 trillion. Interest rates have been and remain low especially given that rates remain at the same level as they were at the worst parts of the crisis.

Additionally, inflation has been at the highest levels since 2008. So far, the market has treated the rise in inflation as being temporary, however, it didn't totally peak until a couple of months ago. The best way to see these forces at play is with real interest rates which reflect the bond market's assessment of rates and inflation. This is calculated by subtracting the 10Y yield from the inflation rate.

Currently, this is at -1.03% which is close to crisis lows. If real rates fall further, then we could see some strength in gold and silver. Of course, this matter could come down to inflation.

The transitory camp sees the rise of inflation as mostly due to supply chain issues, spikes in places like used cars, airline tickets, and the burst of spending due to stimulus checks. The camp which believes that inflation is entrenched simply sees this as the start of a sustained rise in inflation.

The recent inflation report actually provided evidence to both camps. The drop in airline tickets and used car prices led to the first monthly, consecutive decline since October of last year. However, some of this weakness was offset by gains in more "entrenched" categories like rent and healthcare. And, some of the weakness could be temporary given that this is the first month that the delta variant seems to be negatively affecting data.

Currently, it's too early to say which camp is correct given that both sides have strong arguments. Recent history favors the "inflation being transitory" camp given that any spike in inflation has quickly faded over the last decade. This is also what the bond market and precious market is telling us.

However, if they are wrong and inflation does continue to rise, it could lead to big gains for precious metals.