Commodities and real assets are — and will continue to be — on an epic run fueled by cheap money, easy credit (for the right profiles), and central banks propping up financial assets.
Those central banks are trying to create as much space between inflation, where they’re happy to overshoot... and deflation, which is a central banker’s worst enemy.
- Steel is up 58% year-to-date (YTD)
- Copper is up 27% YTD (a 10-year high, and going higher)
- Corn is up 35% YTD
- Soybeans are up 18% YTD
The U.S. has pumped $12.3 trillion of monetary and fiscal stimulus into the economy in the 13 months through March 2021.
The inflation shows and hides itself in many ways. Prices go up at the grocery store or companies keep the price but quietly provide you less paper, coffee, baby food, or soap for the same amount.
Procter & Gamble Operating Chief Jon Moeller, a 33-year company veteran, told the Wall Street Journal that “This is one of the bigger increases in commodity costs that we’ve seen over the period of time that I’ve been involved with this, which is a fairly long period of time.”
That’s one of the largest consumer products companies in the world, which generates over $75 billion in annual sales.
If you happen to have one of those excellent credit profiles that allows you to take advantage of a mortgage you’ll soon realize that you’re competing with cash buyers who are muscling out non-cash buyers in many markets.
Peter Boockvar, who is an excellent source for all things U.S. macro, recently said that investors in the market looking to buy real estate to rent made up 23% of cash buyers in March.
Meanwhile, gold — though not breaking out yet — is starting to show strength, finally breaking through the $1,800 level.
In the meantime, you and I get to buy companies at prices that in a few years will have you (not me, because I’m buying more) pulling your hair out wondering why you didn’t add more.
One Junior Resource Monthly company recently provided 2021 production guidance of 55,000 to 65,000 ounces of gold. News like that is what you should be watching in this time of boring gold prices, because that’s the most important metric during lulls in gold price action.
Is the company you own adding value somehow that the market can re-rate when the time comes?
Back to the unnamed company (you’ll have to subscribe), because it’s a perfect example.
Let’s do some simple math. Ignore the excellent pipeline of precious metals exploration projects. Ignore the very real likelihood of the company beating on the production guidance and/or adding more to the reserve base through M&A.
Let’s just look at what revenue from gold sales will look like this year. I estimate production costs at approximately $1,100/oz.
Gold is sitting right near the $1,800 level. $700 in margin per ounce. I’ll take the median number between 55k-65k ounces per year and go with 60k gold ounces produced this year.
That’s roughly US$42 million in profit or US$108 million in gross revenue. Current market cap of mystery portfolio company in USD is approximately $65 million.
Would it be better for the ego if said company traded at $3 not $1? Sure if you’re into that type of thing. Me?
I want to maximize profits in this cycle so I’m perfectly content to buy more at current levels while the market wakes back up.
Or you can buy Doge, which is up over 100% since last week when I sarcastically said the same thing.