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Count On This Asset When Inflation Strikes

Inflation
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EDITOR NOTE: The tragic flaw in mainstream thinking is that it often confuses what’s popular with what’s relevant. In the world of investments for example, gold tends to be viewed as a marginal alternative. But when mainstream investors like Warren Buffet begin accumulating shares of gold or gold-producing companies, then gold all of a sudden becomes a topic of “normal” discussion. Never mind that gold is the one of the few “currencies” that hold intrinsic value; it has yet to pass the mainstream filter of relevance.  The topic of inflation hasn’t become a “common” concern yet despite the Fed’s aim to purposely raise the inflation rate. Of course, the Fed has everything under control--so goes popular belief. Once the model of monetary control and efficiency begins to crack, the difference between smart money--namely those who think ahead--and “followers” in popular thinking will become transparent.  You can profit by following the mainstream; but often you receive what’s left over by the smart money crowd.

The mainstream financial media loves to label precious metals investors...

They call us names like gloom-and-doomers... goldbugs... and doomsday preppers.

That is, until gold starts heating up – and the economy looks dangerous.

Then, the media starts talking more about everyone's interest in gold. And gold investors like me start to hear from our friends and family again. For example, I was asked a few questions as gold ripped to an all-time high of more than $2,000 per ounce this past summer...

"Should I be selling stocks and buying gold?"

"How do I buy gold? And... what should I buy?"

"Do you think gold will keep going up?"

Normally, this level of interest might give me pause. After all, I've known these folks for years – and they've never seemed to care about my thoughts on gold before.

And frankly, gold did cool off after soaring so quickly to its new high in early August. Over the past few months, it has trended back down to around $1,880 per ounce today.

But the thing is... pullbacks like that are normal in a healthy bull market. And as I'll explain today, I don't believe the gold trade is even close to getting overheated.

If you've been investing for long, you've probably heard plenty from gold's detractors...

The arguments are always the same...

Gold doesn't pay interest or dividends. It just sits there. It's a "barbarous relic," as legendary investor Warren Buffett has put it in the past, that has no place in today's world. As Buffett said in a speech at Harvard in 1998...

Gold gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.

So the finance world was shocked to learn over the summer that Buffett's holding company Berkshire Hathaway plowed more than $500 million into gold miner Barrick Gold (GOLD).

When that news made headlines, suddenly everyone was interested in gold. And while there are still plenty of staunch gold skeptics, my guess is that most folks fall into the same category as my friends and family... They understand that gold holds some sort of importance but may not understand why.

That's what I'd like to explain briefly today...

The most important thing to realize about gold is that it's the only real money...

By that, I mean it's the only currency that isn't someone else's liability. It stands on its own.

Gold has been used as a medium of exchange for more than 5,000 years. Meanwhile, every single fiat (paper) currency in world history has failed. Governments simply cannot resist printing more and more fiat money until it becomes so watered down that it's worthless.

But governments can't print gold. That's why they hate it as a form of currency.

Gold's value comes from its scarcity. And it takes an intense amount of capital, labor, and time to dig it out of the ground and process it.

Historically, during times of financial crisis or political uncertainty, gold has proven its value as a "safe haven" asset. That's why today – perhaps more than ever – it's critical that your portfolio has some exposure to gold...

The economic fallout from the COVID-19 pandemic is incalculable...

But the Federal Reserve and the U.S. government are doing everything they can to prop up the markets. That means the money-printing presses are running hot.

Already, the Fed has pumped $3 trillion into the markets, on top of the $2.2 trillion stimulus package from Congress that sent $1,200 checks to most adults earlier this year. And a second round of stimulus checks is being negotiated as I write...

Of course, none of this money is real. It wasn't earned... It was created.

That doesn't bode well for the value of the U.S. dollar. But it will be great for gold. That's why it's so important to place a portion of your investment portfolio in gold... and soon.

But what's the best way for you to get prepared today?

You can essentially invest in gold in two ways...

The first is simply buying physical gold. By that, I mean gold bullion and gold coins.

This is the ultimate form of crisis insurance.

Gold is a way to store your wealth and preserve your purchasing power. If we do experience a complete economic collapse, gold will still serve as a medium of exchange.

Nobody likes to pay for insurance. We don't ever expect our houses to burn down. But we buy fire insurance just in case... and hope that we'll never need to use it.

Physical gold works the same way...

Try to buy a small amount of physical gold and silver each year and stow it someplace safe. Then forget about it. Trust me, you will sleep better at night knowing that you have this financial insurance.

If taking physical ownership of gold isn't a viable option for you, buy gold stocks, including gold miners, precious metals streaming and royalty companies, or various gold-stock exchange-traded funds. Gold stocks allow you to "juice" your gains as the price of gold rises.

During a bull market in precious metals, like the one we're experiencing now, gold stocks can soar much higher and faster than the spot price of the metal.

Because these companies' costs stay the same as the price of gold rises, the extra revenue goes straight to their bottom lines... giving an investor leverage to the price of gold.

My favorite gold stocks are streaming and royalty companies...

These companies have a fantastic business model...

Mining is an extremely risky business. It requires a ton of capital up front, and miners are at the mercy of cyclical price fluctuations. That makes banks leery of lending them money.

That's where streaming and royalty companies come in... They simply lend the miner money in exchange for a portion of future profits.

And the best part is, after the initial capital is spent, these companies' obligations are finished... They just sit back and collect checks for decades. That makes them very low-risk investments.

Streaming and royalty companies reliably perform well, even during bear markets in precious metals. Because of that, they're a great long-term, buy-and-hold hedge for your portfolio.

Buying gold-mining stocks takes a little bit more homework than buying streaming and royalty companies...

But they can produce incredible gains during a bull market, too.

As my Stansberry Gold & Silver Investor subscribers know, I separate gold-mining stocks into three categories...

  1. Major gold producers are the safest mining stocks to buy. These include companies like Barrick Gold – the one that Buffett bought over the summer.

These "majors" produce millions of ounces of gold per year. They have large mines all over the world with decades worth of proven gold reserves. Given the size of their assets, they can survive cyclical gold booms and busts.

  1. The next tier is intermediate producers. These are miners that might only have a few mines – or sometimes just one.

Intermediate producers are riskier than majors, but they can generate much better returns if you select the right ones. However, it takes research and due diligence.

It's also important to understand the political risk these companies are exposed to in the jurisdictions where they operate. And you must understand a company's growth strategy and the quality of its management team.

  1. Finally, you can invest in junior miners. If you're new to gold investing, it's probably a good idea to stay away from these companies to start. They're extremely risky in most cases.

Junior miners have no revenue. They're either exploring or developing new deposits. Thousands of these small companies trade on Canadian exchanges, and most of them trade for pennies and will never come close to opening a mine.

The sector is full of speculators and scams. So you absolutely must be cautious.

Don't get me wrong... If you do know what you're doing in the gold sector, these stocks can absolutely soar if you pick the right one.

So where does gold go from here?

The thing is, as regular readers know... the Federal Reserve is pushing gold higher.

As a personal rule, I rarely make bold predictions on a price target for gold. But I'm confident that the price of gold will reach $3,000 over the next 12 to 18 months. Here's why...

When we look at gold prices across history, we typically use the "nominal" price. That's simply the number of U.S. dollars it would take to purchase an ounce of gold at that specific point in time.

But we also know that the purchasing power of the dollar has been inflated away over time. A dollar today doesn't purchase what a dollar could buy decades ago.

Meanwhile, the purchasing power of gold has remained relatively constant.

That's why I prefer to look at gold by using the real price. That means using inflation-adjusted dollars (today's dollars) to value gold through history.

So for example, in 1980, the nominal price of gold was $800 per ounce. But in today's inflation-adjusted dollars, the price would be $2,800 per ounce. That means that gold still hasn't hit its all-time high in real terms. It still needs to rise about 50% from today's level.

And it's going to...

Simply put, the Fed wants inflation. And my bet is that we'll get it.

When that happens, you'll be glad you own gold.

Originally posted on DailyWealth

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All articles are provided as a third party analysis and do not necessarily reflect the explicit views of GSI Exchange and should not be construed as financial advice.

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