In the wake of the global pandemic, several factors have contributed to rising inflation. Unprecedented fiscal and monetary stimulus injected trillions of dollars into the economy. Snarled supply chains have created bottlenecks hampering supply and production of goods. Stimulus payments from the government combined with forced savings on travel and leisure left many consumers with a healthy demand for goods and excess cash to deploy. A very tight labor market has led many companies to increase wages to attract new employees. As costs of raw materials, production, and labor have increased, companies have passed on prices to consumers. The outbreak of war between Russia and Ukraine and the subsequent ban on Russian energy imports have helped push oil prices to the highest level since 2008, further fanning the flames of inflation. The latest Consumer Price Index (CPI) reading showed inflation hitting 7.9%, the highest level in four decades.

The Federal Reserve has telegraphed that it plans to tighten monetary policy to combat inflation by raising its benchmark interest rate, starting at its meeting next week with a 25 basis point increase. However, the market decline this year and the potential growth impact from the war in Ukraine may complicate the Fed’s monetary tightening path. Further declines in the markets may compel the Fed to return to an easy policy, which would exacerbate the inflation problem, at which point we expect most investors to seek inflation hedges. We believe gold is one of the best inflation hedges because of its unique properties. The table below compares gold to other inflation hedges.

• Intrinsic Value:  Gold is an industrial metal that is used in several industries including jewelry, electronics and dentistry.  
• Durable: Gold does not corrode or degrade over time. For example, gold that was buried in the earth or at sea several millenniums ago can be unearthed and used.   
• Reusable: After gold has been unearthed and used for one purpose, it can easily be melted and reused for another purpose with virtually no loss of the metal. 
• Divisible: Any amount of gold can be melted and divided into smaller units such that the value of the sum of the units would be close to the value of the whole. 
• Rare: Gold cannot be printed or created. The entire world supply of gold grows at the rate at which miners can extract it from the earth, this rate is ~2% a year.  
• Fungible: Gold is interchangeable, for example all gold eagles have the same value. 
• Compact & Portable: Gold is relatively easy to store or transport. 

Because of gold’s unique properties, during periods of high inflation, gold tends to outperform other sectors. For example, in the 1970s gold increased 21x (from $40/ounce to $843). We recognize that gold is an unconventional investment that receives little attention from mainstream news outlets. However, this unawareness by most of the investing public presents an opportunity for investors who understand how well gold has performed during times of inflation. We believe the best way to invest in gold is by purchasing shares of senior gold mining companies. We have purchased positions in both Kirkland Lake Gold (which recently merged with Agnico Eagle Mines tkr: AEM) and Newmont Mining (tkr: NEM), which we believe are among the best miners in the industry. These companies operate primarily in the safest regions of the world, have low all-in sustaining costs (AISCs, the cost to mine an ounce of gold), carry low valuations, are highly profitable, pay dividends, and have strong balance sheets. With these attractive metrics, we believe these companies will outperform in an inflationary environment.

Individual investment positions detailed in this post should not be construed as a recommendation to purchase or sell the security. Past performance is not necessarily a guide to future performance. There are risks involved in investing, including possible loss of principal. This information is provided for informational purposes only and does not constitute a recommendation for any investment strategy, security or product described herein. Employees and/or owners of Nelson Capital Management, LLC may have a position securities mentioned in this post. Please contact us for a complete list of portfolio holdings. For additional information please contact us at 650-322-4000.