Inflation Contagion Pushes Gold Prices and Mining Stocks Higher

by Anthony Mirhaydari | February 17, 2011 12:37 pm

Inflation is our top economic issue, and current inflationary pressures more pervasive than many believe. Both at home and abroad, prices continue to move higher. And now, price inflation is beginning to cross-pollinate as ultra-lose monetary policy in the United States is exported to places like China. That force of inflation pushes up wages and commodity prices before being exported back to the United States via higher import prices.

In China, core consumer prices increased 2.6% year-over-year for the month from a 2.1% increase in December. And the Producer Price Index increased 6.6%, accelerating from the 5.9% increase in December and coming in well above the 6.1% increase forecast by analysts. In the United States, import prices are rising at a 5.3% annual rate and producer prices are rising at a 3.6% rate.

After flat lining for a few months, inflation expectations are moving higher again. And that’s returned silver prices to their record high and pushed gold prices and gold stocks off their January lows. I think there’s more to come as the market has yet to adequately discount the inflation problem — setting the stage for continued gains by gold and silver in the months to come. Here’s why.

Just look at what’s happening in Asia. Sovereign debt credit analysts at Fitch note that Asian central banks overall have been slow to address inflationary problems. Now that they’re behind the curve, increasing the risk of severe policy tightening and higher interest rates if core CPI pressures spread. It’s not just China. South Korea, the Philippines, and Indonesia also face big problems.

Here at home, there is plenty of evidence that price pressure that have until now been relegated to input prices and food and fuel items are spreading to “core” consumer prices. Whirlpool (NYSE: WHR[1]) said consumer should expect to pay as much as 10% more for its appliances starting in April. Apparel companies like Ralph Lauren (NYSE: RL[2]) and Brooks Brothers said they would raise prices.

Even your underwear is about to get more expensive: Hanes Brands (NYSE: HBI[3]), which has already increased prices, plans to do so again later this year. Limited Inc. (NYSE: LTD[4]), which operates the omnipresent Victoria’s Secret lingerie outlets, is also raising prices.

Of course, the obvious way to protect your portfolio against the ravages of inflation is to hold physical assets through vehicles like the Gold SPDR (NYSE: GLD[5]) and the iShares Silver Trust (NYSE: SLV[6]). But I prefer to hold the equities of companies tasked with extracting these precious minerals.

That’s because over the long haul, as I mentioned last week[7], investors in commodity stocks have posted much better returns than physical commodity investors. Highlighted by Societe Generale strategist Dylan Grice in a recent research note, investors in commodity stocks are betting that human ingenuity will win the day by finding cheaper and more efficient ways to harvest the earth’s bounty.

Two of my favorite stocks in the industry are Allied Nevada Gold Corp. (AMEX: ANV[8]) and Gammon Gold (NYSE: GRS[9]). Both are pushing up and out of overhead resistance. Allied gained 3% today as it moves out of a six-month trading range. Both are still good to go.

For more general exposure, be sure to look at the Market Vectors Junior Gold Miners (NYSE: GDXJ[10]), which holds smaller, more nimble “high beta” plays like Hecla Mining Company (HL) and Allied Nevada.

Disclosure: Anthony does not own or control a position in any of the companies or funds mentioned. He has recommended ANV and GRS to his newsletter subscribers.

Be sure to check out Anthony’s new investment advisory service, The Edge. A two-week free trial has been extended to Investorplace readers. The author can be contacted at anthony@edgeletter.com[11]. Feel free to comment below.

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