In this article, Frank Holmes, CEO of U.S. Global Investors — which launched the World Precious Metals Fund [UNWPX] in 1985 — looks at lithium and other battery metals.
Gold hasn’t been getting much love from investors lately due to rising bond yields, and bullion-backed gold mutual funds and ETFs have seen significant outflows so far this year through the end of February.
Before pulling your money out, though, I would advise investors double check what’s in the fund. During this period, we’ve managed to outperform many of our peers thanks to a substantial rotation into metals and minerals that will increasingly be needed in advanced technology, including lithium-ion batteries.
Besides lithium, we like copper, nickel, cobalt and graphite, and we see great upside potential in companies that not only produce these minerals but also develop the technology behind the batteries.
Further down, I’ll be sharing one of these companies with you and how it’s helped us outperform during the gold correction.
Record-setting money printing increases the attractiveness of hard assets
First, I think it’s important for me to say upfront that we still have strong conviction in gold and believe one of its most convincing long-term investment cases is the alarming growth in money supply in the US. There are different ways to define “money,” but let’s look at highly liquid M1, which includes cash outside the US Treasury, money market deposit accounts and other forms of so-called “near money”.
As you can see, the amount of cash floating around the economy is up a head-spinning 355% compared to last year. This is a record rate, and it’s not even close. To combat the economic impact of the pandemic, policymakers flipped on the printing machines and never bothered to shut them off, flooding the US with easy money.
The law of supply and demand may apply to currencies just as it does to any other asset. This extra liquidity has helped prop up the economy and lift stock prices, but an unintended consequence could very well be dollar depreciation — suggesting inflation may not be too far behind.
When and if that happens, I think investors with exposure to gold and gold mining would be in a much better position than those without. Historically in times of accelerating inflation, the yellow metal has improved portfolios’ risk-adjusted returns and delivered positive returns, according to the World Gold Council (WGC).
Is inflation already here?
Inflation expectations over the next five years have risen to their highest level since 2011. Below you can see the five-year breakeven rate, which represents a measure of expected inflation derived from nominal five-year Treasury bonds and inflation-adjusted five-year bonds.
In short, it tells you what market participants believe inflation will look like in the next five years. On 2 March, the rate hit 2.4%, the highest reading since May 2011.
A more immediate measure of real-world inflation is the ISM Prices Index, issued by the Institute of Supply Management (ISM) as part of its monthly “Report on Business” survey.
A number of purchasing and supply executives reported higher prices for raw materials in February, the ninth straight month of observed inflation. The index registered a sky-high 86.0, the highest reading since July 2008 (the higher the number is above 50.0, the faster the inflation).
All 18 industries surveyed reported higher prices from their suppliers, including primary and fabricated metals, appliances, chemical products, food and beverage and computers and electronics.
Businesses are choosing to pass the extra costs on to consumers, or else are considering it.
This week, Michelin [ML.PA] North America announced it would be raising prices by as much as 8% on tires for select passenger and delivery trucks due to “changing business dynamics and rising costs of raw materials”.
On a mid-February earnings call, Melinda Whittington, CEO of La-Z-Boy [LZB], said that because of escalating costs on materials and freight, “we continue to evaluate the need for further pricing actions”. General Mills [GIS], maker of Cheerios, Yoplait and Blue Buffalo pet food, is reportedly weighing price hikes on its products.
Gold and gold mining stocks are undervalued compared to broader market
Despite its strong investment case right now, gold has fallen out of favour with some investors due to rising bond yields and expectations of a strong economic recovery. The yellow metal was down 17% from its 52-week high, as of 3 March.
I believe this represents a good time to buy on the dips as gold and gold mining stocks remain greatly undervalued compared to the broader market. Metal producers are on sale right now, having fallen more than 11% year-to-date (through 3 March), as measured by the NYSE Arca Gold Miners Index [GDX].
It’s also been an opportune time to get exposure to smaller precious mineral explorers and companies that source great quantities of them. This has been one of the investment strategies in our World Precious Minerals Fund [UNWPX], which gives investors additional access to junior and intermediate producers and explorers.
This article was originally published on Frank Talk, a blog by Frank Holmes, CEO of US Global Investors.