There are lots of stories circulating the markets right now. The booming of electric-vehicle stocks like Rivian and volatile crypto markets are two that stick out. However, the most pervasive story affecting all investors is rising inflation.
On Nov. 10, the U.S. Bureau of Labor Statistics reported that the Consumer Price Index is up 6.2% over the last 12 months. Supply-chain issues, higher raw material costs, and seven-year-high oil and gas prices are just a few of the reasons why inflation is at a 30-year high. Rising prices affect nearly every sector of the economy, as companies are pressured to either soak up added costs or pass those costs along to their customers through price hikes.
Enjoy golden slumbers while inflation causes others to lose sleep
Scott Levine (Franco-Nevada): You don’t have to be the savviest of investors to know that buying gold is a long-practiced strategy for safeguarding against economic uncertainty. What’s less well-known, however, is that gaining exposure to the yellow metal transcends pawning those gold necklaces pushed to the back of the jewelry drawer or visiting the local coin gallery to buy bullion. In fact, your gold investment choices extend beyond the companies that dig it out of the ground.
Instead, the best route for adding luster to your portfolio to guard against inflation is a royalty and streaming company. Unlike gold-mining companies that assume considerable risk in developing and operating capital-intensive gold assets, royalty and streaming companies like Franco-Nevada act as a particular type of financier that provides upfront capital for mining companies to develop their assets. In exchange, royalty and streaming companies retain the right to purchase a percentage of the mined mineral at a preset price or the ability to collect a percentage of mineral production from mining operations. While Franco-Nevada has exposure to various precious metals, as well as energy assets, it’s gold that provides the lion’s share of the company’s revenue: 54% in Q3 2021.
Okay, you’re thinking, so it’s a different type of gold stock, but it still depends on the price of gold to rise, right? Wrong.
The company’s operating model means that it will certainly benefit from a rise in the price of the yellow stuff, but it’s not a zero-sum game — the price of gold can fall and the company can still prosper. Take last quarter for example.
In Q3 2021, Franco-Nevada reported an 8.7% year-over-year increase in the amount of gold equivalent ounces. Meanwhile, the company reported a 6.4% drop in the average price of gold, compared to the same period in 2020. Despite these two conditions, the company reported strong year-over-year growth in terms of revenue and net income of 13% and 7.9%, respectively.
Don’t complain about rising raw copper prices — buy copper miners
Lee Samaha (Freeport-McMoRan): The logic is simple: If one of the reasons inflation is rising comes down to increasing raw material prices, then it makes sense to buy stocks that directly benefit from them. Therefore, it makes sense to start looking at the most economically sensitive commodities, which usually means copper.
Copper is used across construction, electrical networks, industrial machinery, transportation, and consumer products — you name it. So when the economy picks up, there’s increased demand for copper. That’s how investors have traditionally looked at the metal.
However, the reality is that copper will receive a long-term demand pull from…
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