Funny you should ask that. I just posted to someone else that this is precisely what I did. I have a 10% portfolio position in gold/silver through CEF. But I bought a bunch of PICK (materials miners) and SGDM (precious metals miners) back in mid Aug to mid Sept. My PICK etc is up a lot, while my SGDM, not so much. I bought them at the same time, because I often do pair trades where I think both have asynchronous upside potential, but the pair together have hedging characteristics against each other.
As to my thoughts on inflation, I'm not really sure about inflation. Inflation is the dog that perennially doesn't bark. If you ask me if inflation is coming or already is here on things you and I buy in our daily lives, then I'd say, "isn't it obvious that it's already here?" I mean prices of food and just about all normal goods have become expensive. But if you ask me about inflation as measured by the Fed, then I'd say, I doubt we're going to see any meaningful inflation there. It's the irony of Japanification. The more you print and spend, the more suppressed central bank measured inflation becomes.
Here's why. First, the Fed doesn't measure real inflation. They use hedonics, exclusions, and all sorts of other non-sense to mute their inflation figures. So it's really just a bogus number. Second, the Fed prints and spends the new dollars on corporate and treasury bonds, which suppresses nominal rates. Third, I don't think gold moves on CPI or PCE or any of those measures. Instead, I think gold discounts the real yield on bonds, more specifically, the 10 year. I think studies have shown a decent correlation there, but it comes and goes with the eras. One common sense reason for this is that portfolio managers need a hedge against stock market volatility in their portfolio, which is why the famous 60/40 split between stocks and bonds. But most managers will tell you that hasn't worked this year. I think the reason why is that bonds are at historically high prices, so high in fact, that real inflation subtracted out of nominal yields, leaves you with not only a negative carry, but also the real possibility of a large loss on principal. So most managers have historically said they don't like to hold gold in the portfolio, because it has a negative carry burden. It costs money to store gold and that creates a decay rate on gold. The only time it makes sense then to hold gold is when you have a negative carry or decay rate on bonds, which we do have now with negative real yields. So that is why this year, back around March-April, I replaced my bonds with gold and I won't buy back into bonds until they have a substantial correction to bring yields back to a decent positive real rate of 2% or higher. That may take awhile and probably won't happen for many years.
Lastly, as to REITs, I understand the temptation to reach for some yield with those right now, but that's not a light at the end of the tunnel you see there, but rather a train coming at you full speed. I will not invest in REITs until after the Fed and Congress have removed the training wheels and the bad debt from payment moratoriums and defaults has been fully flushed out. There's bad juju in REITs that hasn't been excreted yet. So REITs are in for a reckoning at some point in the future. Too much risk there for me. I'm heavy into small and mid cap value (MDY, IWM, IJS), materials (PICK) and precious metals (SGDM) miners, I have a huge chunk of XOM, and a 10% portfolio position in CEF (allocated gold/silver). Oh and I also have about a 15% position in a lot of emerging and developing market country ETFs, including a large position in a china etc (GXC). So you can see, I believe there will be ongoing dollar weakness against a backdrop of an improving economy in the future, which should benefit all of my positions, but as to inflation, I don't believe inflation will get out of control, as measured by the Fed, which is all markets care about. As for real life inflation, yeah, things will continue to get more expensive for normal people, which is why we all need to make sure our investments are working for us to outpace real inflation. |
