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You're likely to come across articles about investing in gold as an inflation hedge anywhere you look. This is especially the case, as the economy could be heading toward hyperinflation. However, it appears that gold is losing some of its luster as an inflation hedge.
On the other hand, there is one scenario in which the yellow metal could once again enable investors to hedge for inflation, and it looks like that scenario could be in play. Gold miner stocks also offer a place for investors to hide from the possibility of hyperinflation.
Is gold losing its status as an inflation hedge?
Two traders told CNBC recently that gold is losing its status as an inflation hedge. Citing data from Morningstar Direct, Nancy Tengler of Laffer Tengler Investments told the news outlet on Friday that gold hasn't posted positive returns during times of steady inflation since the 1970s.
She added that since the Labor Department's announcement that inflation increased the most on a year-over-year basis since 1982 in November, the yellow metal has only increased by about 1%. According to Tengler, real estate investment trusts, real estate, and stocks, in general, are serving as better inflation hedges right now.
Tengler also said if the dollar continues to weaken, gold could see more action. However, she believes some other metals could be better options due to the "narrative behind those in terms of planetary decarbonization [and] green energy."
In the same interview, Craig Johnson of Piper Sandler told CNBC that the only way gold might end up being a successful inflation hedge is if the U.S. prints too much money. He noted that the yellow metal has declined relative to breakeven five-year inflation rates, bitcoin and REITs since the beginning of last year.
Printing money
Daniel Oliver of Myrmikan Research has been writing about the Fed printing money for quite some time. In the December installment of his newsletter, he said the Fed is now out of sync with the credit cycle. He added that the problems with the world's supply chains have only worsened as the average wait time for a ship to get a berth in Los Angles has risen from seven days in August to 21 as of the end of November.
Additionally, Oliver said rising prices are suppressing consumer demand. News headlines widely reported that retail sales were up 18% year over year in November, but after adjusting for inflation, sales were actually down.
The Fed said in May that it thought asset prices were too high, adding that they "may be vulnerable to significant declines should risk appetite fall." Oliver pointed out that prices would have to fall 10% to return to May's levels and presumably much more beyond that to reach the Fed put level.
One thing left for the Fed to do
He added that it once took years for the Fed to bounce back and forth between boom and bust, like the roughly 10 years that passed between the internet bubble in the late 1990s and the bust in the early 2000s. However, the cycle is now happening faster and faster.
As a result, Oliver believes the Fed will soon face a deflationary collapse of asset prices paired with higher consumer inflation, leaving it no choice but to print more money. He warned that it won't be "the QE kind of printing—cautious, hidden in the plumbing of the financial system, limited in scope—but public, no-limits, dump-currency-in-people's-front-lawns kind of printing."
If Oliver is right about the no-holds-barred money printing, then gold could indeed resume its status as an inflation hedge. However, there is another way to get exposure to the gold market without actually buying the metal outright.
Gold miner stocks may be a much easier and better way for investors to tap into the possibilities of the gold market.
Disappointing times for gold mining stocks
However, investing in gold miners right now is not for the faint of heart. They are at least partially tied to the gold price, but they also are stocks, so they depend upon the stock market as well.
Oliver pointed out that November was another challenging month for gold miners. The GDXJ Junior Gold Mining exchange-traded fund gained 12% by the middle of the month but ended November down 1.3%. However, unlike the movement in gold prices, the gold miners ETF moved similarly to the rest of the stock market, although with more significant upward momentum. The S&P 500 was up 3% by mid-November, but it ended the month down 2%.
Oliver explained that gold stocks tend to trade in step with the broader markets in the short term, but they are not correlated with the rest of the stock market over the long term. The S&P has surged 23% year to date, while gold stocks rose significantly in 2019 and 2020, making them due for some consolidation.
Why the recent weakness in gold stocks could be a positive setup
Oliver believes that the long-term, non-correlated relationship between gold stocks and the rest of the stock market could be why gold stocks have struggled this year. He also pointed out that gold has remained stuck below $1,800 an ounce after trading higher than $2,050 in August 2020.
However, Oliver also noted that gold prices were stuck below $1,300 an ounce as recently as May 2019. He added that current gold and silver prices are certainly high enough for most miners to turn sizable profits, even as costs rise.
The Myrmikan researcher also pointed to the large amounts of M&A activity in the gold mining sector over the last month, which suggests larger players see value in smaller companies. For example, Newcrest Mining acquired Pretium Resources at a 22% premium to the market, while Kinross acquired Great Bear Resources at a 40% premium to Great Bear's 20-day volume-weighted average price.
On the other hand, some smaller gold miners are starting to have difficulty obtaining project financing at decent terms. For example, Amarillo Gold sold itself to Hochschild Mining at an 80% premium because it couldn't obtain decent terms to develop its shovel-ready project.
Why now might be the time to buy gold stocks
Oliver believes that investing in quality gold miners will result in substantial gains when gold gains momentum again and financing conditions improve or that acquirers will have to become more aggressive in the targets they pursue and the prices they pay.
Despite these issues, Oliver feels the macroeconomic case for owning gold mining stocks is strong due to the possibility of runaway inflation, excessive money printing and deflationary collapse.
"Myrmikan Capital invests in gold mining companies not because it hopes to slowly compound capital over time but because the central banks are going to fail, global currencies are going to collapse (or be canceled), much value will be revealed to be imaginary, [and] gold will reestablish itself as de jure currency and not just de facto money," Oliver declared.