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Inflation exceeds the Bank of Canada’s 2% target rate.
Economists have different views on whether the peak is transient and for how long inflation will stay at high levels. Some experts say the price hike will not go away, even after the bottlenecks in the supply chain disappear.
If you believe the current situation will last for two or three years, it makes sense to consider some stocks that should benefit from an inflationary environment.
Barrel gold (TSX: ABX) (NYSE: GOLD) is one of the largest gold mines on the planet with five of the top 10 level one mines in the world. The company is also a large producer of copper.
Gold is widely regarded as a good hedge against inflation. The theory has its supporters and its critics, but it makes sense that people who worry about inflation have some exposure to gold.
Gold is valued in US dollars. When the US dollar loses value against a basket of key international currencies, the price of gold tends to rise. Holders of dollars can protect themselves against the fall in the value of their money.
In case someone lives in another country and inflation is a problem, owning gold is a way to protect one’s wealth and to guard against a severe devaluation of the currency against the dollar.
Central banks also buy gold as part of their hedging strategies. Printing money to stimulate economic activity is becoming more and more common with interest rates this low. The downside to this strategy is the severe potential devaluation of a country’s currency. Owning gold diversifies reserves.
Barrick Gold is trading at nearly $ 23.50 per share at the time of writing, up from $ 40 when gold hit US $ 2,080 an ounce. Gold is currently trading at around US $ 1,768 an ounce. It’s only a 15% drop from the 2020 high, but Barrick Gold is down over 40%.
The company’s balance sheet is in good shape and the board of directors has paid out significant funds to investors in 2021 via the dividend and a special return of capital. A big dividend increase could be on the way for 2022 and Barrick Gold’s share price is expected to take off if gold takes a further tailwind next year.
Royal Bank (TSX: RY) (NYSE: RY) is Canada’s largest financial institution with a market capitalization of over $ 180 billion.
The bank is very profitable, even in difficult economic times. In fact, Royal Bank typically makes net profits in excess of $ 1 billion per month and offers a return on equity that is the envy of most of the world’s major banks.
Persistent inflation could force the Bank of Canada and the US Federal Reserve to raise interest rates earlier than expected and by larger amounts than the market expects. Higher interest rates drive up borrowing costs, which can put heavily indebted businesses and homeowners in a difficult position.
However, higher interest rates tend to be a net positive for banks, even when defaults increase. They can improve net interest margins, and banks are able to generate better returns on the cash they need to keep available to cover deposits.
Royal Bank is not as cheap as it was in 2020, but the stock is still reasonable at the current multiple of around 12 times earnings made, especially considering the quality of the business. .
The bottom line
Barrick Gold and Royal Bank seem like good choices to add to your portfolio today, even if inflation turns out to be transient. If inflation remains high for a long time, these stocks should benefit.