Gold's Month In Review

Excerpt From the March 2022 Gold Resource Investor Letter

Gold put in a stellar performance in recent weeks. It was bolstered by Russia’s invasion of Ukraine, but it’s also clear that gold was rising well before that. This is a chart of gold for the last 2 months.

Although the invasion started on Feb. 24, gold bottomed in late January and rose very steadily before and after. Then last week it exploded higher, peaking over $2,050, and reaching a new record intraday high of $2,078 on March 8th.

It has backed off but has so far held above $1,900, a level last seen in June last year.

Last week, the World Gold Council reported that investors were rushing into gold-backed exchange-traded funds (ETFs). February saw net inflows of 35.3 tonnes, worth $2.1 billion.

In the meantime, oil, natural gas, coal, wheat, nickel, copper, zinc, and many other commodities soared. Most have pulled back somewhat but remain at higher levels.

I think the economy is facing a lot of challenges. In my view, we’re likely to enter a period a lot like the 1970s, which faced low growth and strong inflation. It’s a phenomenon known as stagflation, where the economy is stagnant, but prices still continue to rise as governments keep printing money aggressively.

Here are a few statistics I came across recently that, frankly, I find shocking and worrisome. After surveying over 2,600 adults, a report by Lending Club said that just three months ago, in December, 61% of the U.S. population was living paycheck to paycheck. At the start of this year, that number had jumped to 64%, just 1% below the peak of 65% reached in 2020. Now that’s scary…but get this.

You’d think that people earning north of $100,000 would be doing ok. But you’d only be partly right. That’s because nearly half, or 48%, said they too are now living from one paycheck to the next. Last December, that number was 42%.

The reason is no secret, at least not to subscribers of the Gold Resource investor. There’s one main cause: INFLATION!

In April 2020, prices started to climb. But by early 2021, the fallout from the massive stimulus, low-interest rates, and money-printing kicked into high gear and lit a fire under prices. The Consumer Price Index jumped from under 2% to over 6% in just 8 months.

But this next chart really says it all.

The average hourly earnings rate fell dramatically between April 2020 and April 2021, before bouncing back. It has bounced back since but hasn’t been able to keep up with inflation. This is what people are facing on a daily basis as their incomes are being squeezed by higher prices. And this only measures what’s happened up until October last year. Since then, prices have risen much more quickly, likely squeezing the average household even further.

And that leads us to the latest U.S. inflation numbers. February data was recently released, and at 7.9% over the past year, it was higher yet again!

We’re now at 40-year highs, with inflation still rising. And that doesn’t even include the past three weeks since Russia invaded Ukraine, and oil, wheat, natural gas, fertilizers, and a whole host of other commodities prices have exploded higher. It’s almost certain that March inflation, when reported in April, will be notably higher again.

I think we’re now at an inflection point. Many people have seen the high and rising inflation of the past year, but probably thought it will soon fall back to a more manageable level. The February 7.9% annual rate included month-over-month increases of 1% for food, 1.2% for personal care items, 1.9% for health insurance, 1.2% for auto insurance, and 5.2% for airfares.

I expect inflationary psychology to kick in. That’s when people start to accept that inflation is going to remain at high levels, and for the next several years. As a result, they try to “get ahead” of inflation. So they buy more, and they buy some things sooner to avoid even higher prices in the future. This creates a feedback loop of even higher and faster-rising prices; a vicious circle that becomes very difficult to break.

How can you get a leg up in this challenging environment? Investing in the resource space automatically provides you with natural hedges against all these price increases.

It’s the old adage: “If you can’t fight ‘em, join ‘em”. As consumers, there’s not a whole lot we can do about rising prices. So if you’re going to pay more for just about everything from energy to food, you might as well invest in the companies that produce all the commodities whose prices are rising, and stay ahead of inflation.

While the S&P is down about 13% so far this year, several holdings in the Gold Resource portfolio are up over 10% to 30%, while paying strong dividends. And that’s just in the last two and a half months!

The Gold Resource Investor’s portfolio holds exactly the kinds of stocks that are not just keeping up, but thriving as we face inflation head-on.