This Catalyst Could Light a Fire Under Gold Again

Since last time we talked in April about my entry in the InvestorPlace 10 Best Stocks for 2021 contest, Osisko Gold Royalties (NYSE:OR) is still hanging onto a 6% gain year-to-date. This is somewhat better than the dismal 6% loss the Van Eck Vectors Gold Miners Index has produced.

A gold bar along with some coins made of precious metals. gold stocks
Source: allstars / Shutterstock.com

But Osisko has been drifting lower for the last three weeks … just like most other stocks in the gold-mining sector. Despite the fact that some inflation indicators are hitting 20-year highs, the precious metals are refusing to move higher.

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That’s a bit surprising … and unusual. Perhaps the sector is suffering from a kind of “inflation fatigue.” In other words, even though the inflation readings are high rising, investors seem not to care.

But I suspect this widespread complacency will fade away over the coming months, to the benefit of the gold market broadly … and to Osisko in particular.

Inflation: You Know It When You See It

So let’s dive a little deeper into the macroeconomic relic called “inflation.”

Clinically defined, inflation refers simply to the rising prices of goods and services. But in the real world, inflation is somewhat more complex. It can appear in a variety of forms and can change its location without warning.

That said, inflationary effects are usually easy to see. In this sense, defining inflation is similar to the way Superior Court Justice Potter Stewart defined pornography, “I know it when I see it.”

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Like, for example, the moment last week when I asked a bank teller to withdraw $500 in $50s from my account. As she counted out the bills, she smiled and joked, “Well you know, $50s are the new $20s.”

At that moment, we both knew what inflation looked like. Inflation also looks like a $12 price tag on an eight-foot redwood two-by-four that cost just $6 last year.

Inflation’s “sudden” appearance should not be a complete shock. It is the result of two primary forces:

  • A massive, new QE campaign
  • Off-the-charts government spending

Either one of these factors, by itself, might have been sufficient to nudge inflation into a higher gear. Both of them at once could kick inflation into a gear we haven’t seen since the Bee Gees’ “Stayin’ Alive” was topping the music charts.

Yet, very few investors or high-profile financial figures seem too troubled by the rising inflation readings. To them, as James Grant recently observed, “inflation seems not so much a threat as a relic.”

Even Jerome Powell, the chairman of the Federal Reserve, shares that approximate perspective. He clearly believes deflation-fighting is Job No. 1, and he has enlisted the forces of inflation to help wage that fight.

During the last year and a half, for example, the Fed’s QE program has sopped up nearly $4 trillion of treasuries and corporate bonds — or more than double the total the Fed acquired during the preceding 11 years.

Remember, QE is a form of money-printing … and money-printing is quite literally the thing we call “inflation.”

So let’s score one point for inflation.

Saving the Economy … or Not

Meanwhile, just a short walk from the Federal Reserve Board Building in Washington D.C., our congress-folk have been producing the largest government deficits since World War II, thanks to $3.5 trillion worth of economic rescue packages.

In the name of “saving the economy” from the ravages of the coronavirus pandemic, the government is spending trillions of dollars it doesn’t have.

During the last 12 months, the federal government has racked up an astonishingly large deficit of $3.6 trillion, which is nearly double the astonishingly large $1.9 billion deficit of the preceding 12 months.

The $3.6 trillion figure is equal to 16% of GDP, which is the largest annual deficit since 1945 — the year we were busy winning a world war on opposite continents.

Traditionally, soaring government deficits coincide with rising inflation. So let’s score a second point for inflation.

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Obviously, inflation isn’t good for much. It squeezes profit margins and undercuts the value of our savings. But inflation can be a “friend” to hard assets like real estate, commodities and precious metals. In fact, inflation and gold have been “BFFs” for centuries. And they probably remain close friends today, even in this modern, cryptocurrency-enabled age.

Until proven otherwise, therefore, I’m betting gold will continue to provide at least partial protection from any serious bout of inflation.

Of course, it is possible that gold has become somewhat irrelevant in a world dominated by Bitcoin (CCC:BTC-USD) and other cryptocurrency marvels.

But I suspect the ancient monetary metal still possesses some relevance in the modern era … perhaps even a relevance that is inversely correlated to cryptocurrencies!

In other words, gold might not only function as a hedge against inflation but also as a hedge against slumping cryptocurrency prices … if that were to occur.

Because the current inflation trend is gaining momentum, and because I expect gold to respond favorably to that trend, I am also expecting Osisko Gold Royalties to move even higher as well … and to finish the year on a strong note.

Osisko is but one of many stock recommendations I have made to members of Fry’s Investment Report.

In fact, yesterday I published the July issue of the Investment Report (click here to find out how to get that issue). And in it, I make a brand-new recommendation.

Thanks to this company’s market-leading position in cables crucial to the development of the internet, the company became a stock market darling during the dot.com bubble of 1999–2000.

From September 1998 to September 2000, its shares skyrocketed more than 1,00%. But that was just about the time the boom in this type of cable peaked.

By 2002, worldwide installations had collapsed … and so had this company’s share price.

It survived that collapse, however. And now, the worldwide 5G buildout tops the list of tailwinds that are set to make this company thrive once again.

To find out how as a member of Fry’s Investment Report, click here.

Regards,

Eric Fry

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NOTE: On the date of publication, Eric Fry did not own either directly or indirectly any positions in the securities mentioned in this article.

Eric Fry is an award-winning stock picker with numerous “10-bagger” calls —in good markets AND bad. How? By finding potent global megatrends… before they take off. In fact, Eric has recommended 41 different 1,000%+ stock market winners in his career. Plus, he beat 650 of the world’s most famous investors (including Bill Ackman and David Einhorn) in a contest. And today he’s revealing his next potential 1,000% winner for free, right here.


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