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Valyooo (99.63)

Inflation and metals vs metal equities

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December 17, 2010 – Comments (11)

If we do experience large inflation (which I think we will), commodity price increases always lead to consumer price increased (why wouldn't a sector raise prices if their costs increase?).  However, wall street hates inflation, so stock prices may not react so nicely.  So if one truly believes a precious metal is a good hedge against inflation, then you should be buying the actual, physical metal...how could you be bearish on equities and buy metal miners?  I am bullish on metal miners, but for non-contradictory reasons.  Inflation is bad because of "menu costs" and "shoe leather costs" and redistribution of wealth...but its not the end of the world...stuff gets more expesnive, and peoples incomes go up (people forget this second point...where else would the money go?

I'm probably wrong somewhere, so tell me where

11 Comments – Post Your Own

#1) On December 17, 2010 at 5:17 PM, Valyooo (99.63) wrote:

Note that silver and gold are better than other metals in this thought process because they are seen as currencies of last resort and rise when the dollar falls, always, because people hold these instead of dollars. Also, commodity dealers don't have to keep re-doing price analytics, they just check market prices, which is one reason miners can be better miners during inflation. My point still stands though

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#2) On December 17, 2010 at 7:00 PM, ChrisGraley (30.25) wrote:

The money goes to increase costs for raw materials and not in the laborers pockets in most cases. So the consumer now has the same amount of now weaker dollars.

The wage/price spiral doesn't always work and wages always lag prices even when it does.

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#3) On December 17, 2010 at 7:23 PM, outoffocus (23.59) wrote:

Valyoo, wages only go up if the inflation we experience is because of a booming economy.  In our case, our inflation is due to a weakened dollar, which really just leads to more stagflation, and higher prices further cripple consumption.

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#4) On December 17, 2010 at 10:23 PM, Valyooo (99.63) wrote:

But if the commodities are domestic, then the people selling the commodities get the increased money, which leads to increased wages for farmers, right?

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#5) On December 17, 2010 at 10:25 PM, outoffocus (23.59) wrote:

Yea but isn't only 3% of our economy in agriculture?

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#6) On December 17, 2010 at 10:31 PM, 100ozRound (29.70) wrote:

Don't overlook input costs.  If the input costs are higher, any increased wages are marginal

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#8) On December 17, 2010 at 11:05 PM, NOTvuffett (< 20) wrote:

The big problem here is inflation.  I would rather have an equity than a static asset like gold bullion, etc.  What it comes down to is that if you have a dollar denomimated asset which has appreciably increased in its price in dollars and you sell it for a profit, it doesn't matter how much of the price increase is from pure inflation, your tax liability would be the same as if the dollar was constant in value.  In the past, people that traded like this (in bullion) were largely immune to this effect, but the new health-care law requires reporting of all purchases over $600 from vendors via a form 1099.

Even if we had an adjustment with a broken CPI for capital gains it would be better than the current system.  

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#9) On December 18, 2010 at 12:16 AM, ChrisGraley (30.25) wrote:

I'm not totally on board with NOTvuffet, but I understand where he is coming from. The big problem I have with miner equities over metals is that I have a bunch of new risks. I do own some miners, but I own the best in breed. I have to constantly look at oil prices though. Miners use a ton of oil.

When I bought metals before and buy metals now, I'm looking at least a 20 year time-frame. I'm actually looking at a time-frame past my lifetime, because I don't think that our government has a different answer other than printing more money. If you want to buy a miner and can evaluate management well, that's fine, but buying the metal itself is so much easier. I don't have to worry about the whims of any government. I don't have to worry about evaluating management and I don't have to worry about the price of oil which I think is going to surge real soon.

As far as the increase of profit to farmers go, you hit the nail on the head Valyooo. They have a low dependence of commodities. They hire few laborers. You have to worry about the weather, but food prices will keep going up with the population even when our government figures things out. (And they will never figure things out)

Very soon food is going to become crucial. It would have become crucial in a stellar economy. It will be even more crucial in a weak one.

Seriously, the best play on this is not to buy AG stocks, but to buy farm land.

 

 

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#10) On December 18, 2010 at 12:33 AM, Valyooo (99.63) wrote:

I don't understand...everybody keeps saying increase costs is the problem...if costs increase its because somebody is increasing the price...whoever is increasing those costs is gaining

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#11) On December 18, 2010 at 4:39 PM, walt373 (99.75) wrote:

Worried about China and what it will do to metal prices and stocks. They're the source of a lot of that demand and a lot of that is going into a supposed real estate bubble. If that blows up, prices are going to drop a lot.

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