Here is a little dose of reality for all of those inflation naysayers out there…
- 76% of Americans are living paycheck-to-paycheck.
- 65% of Americans say they own their homes.
- 53% of Americans have no money in the stock market, even through retirement accounts.
Together, these three depressing facts mean a vast majority of Americans have seen their wealth and income crushed by inflation.
Your wealth needs to have grown 240% over the last thirty years to have out-paced inflation.
Unless you have owned your home for thirty years or heavily invest a large portion of income in the stock market, there is little chance you have experienced anything close.
If you bought a home in 1984, on average the appreciate falls just short of keeping up with inflation.
Right off the bat, we know a third didn’t do that. And the real number is much higher.
Considering a 30-year mortgage is the longest you’ll find and only 30% of U.S. homeowners don’t have mortgage debt, we can infer that a majority of Americans have seen their real estate trail behind inflation.
The S&P 500 is up nearly 1,000% over thirty years. We know 53% didn’t ride that wave. Yet again, the real number is much higher.
The average head of a household in the U.S.A. only has $12,000 stashed away for retirement.
That leaves income as the major source of wealth creation for well over a half of Americans, which is clearly the case considering 76% live paycheck-to-paycheck.
Check out this graph to see how stunningly depressing life has been for Americans over the last thirty years…
There has been a 30% real wage increase and a nearly 240% increase for all items in the consumer price index.
Effectively, anyone dependent on wages has seen his or her purchasing power drop by half.
Of course, it isn’t all roses for investors, either. The compound annual growth rate of the S&P 500 is 11.14%.
According to official U.S. government data, annual inflation has grown at 4.14% over the last thirty years.
Of course, that’s after the government implemented all sorts of shenanigans to make inflation seem artificially low. If we still determined inflation using the calculations from 1980, it’d be significantly higher…
The simple fact of the matter is inflation is pushing a majority of Americans into poverty and deeper into debt while creating a massive headwind for wealth creation for the rest.
Anyone taking the government and Federal Reserve’s dismissals of inflation concerns at face value is ignorant to reality.
The Best Way Out
I wish I had a way out for the half of Americans that don’t have any exposure to the markets or the 76% that live paycheck-to-paycheck. If I did (without ripping out the heart of free market capitalism), I’d be a shoo-in for a Nobel Prize.
For those of us with money to invest, there is a tried and true way to offset some of the effects of inflation on our portfolios.
Get into gold and gold miners.
I know the idea is anathema to some that got into gold late in a speculative rush and then were burned by a correction in gold prices, but playing gold two ways going forward can protect part of your savings and drive gains.
For 5,000 years, gold has been the world’s reserve currency. A correction in 2013 will not change that.
Gold is up roughly 400% over the last thirty years.
Go back to when President Nixon abandoned conversion between the U.S. dollar and gold reserves in 1971, and gold is up 3,500%. Even the S&P 500 can’t match that performance.
If you’re in a position to buy gold bullion, it’s probably a good time to start or add to your holdings. Here is why:
We’re looking at a chart of rolling ten-year averages of gold prices and the consumer price index — the official measurement of inflation used by the government and the Fed.
As we can see, the average change in the price of gold over the last ten years now matches the average official rate of inflation over the last ten years.
This coincides with gold trading around $1,200 per ounce. At this price, many gold mining operations become unprofitable, supply constricts, and exploration and development grind to a halt.
Both factors create strong support for gold at the prices we’re seeing now and plenty of room for greater gains as confidence in fiat currencies inevitably erodes further.
We’re at a very attractive entry point for protecting ourselves against inflation and creating long-term gains. Two birds, one stone.
Out-Performing the Market
Of course, going all into any one investment is risky, even if it is the world’s oldest and best store of wealth.
But there is another way to drive short-term gains that can be converted into long-term wealth when it comes time to cash out of the market.
If you happened to catch an article of mine on November 26, 2013, I discussed how gold had found a bottom and how certain gold miners would be well positioned to take off.
Since then, gold prices have bounced up and down, but are basically flat.
However, the gold miners I discussed in the article have done far better with one exception.
These were just examples of the kind of miners to search for and aren’t recommendations we’ll closely monitor. However, they will show how market sentiment has finally turned for the miners that either:
- Have low-cost production that is viable at today’s prices, or
- Have low debt ratios or the cash to last until gold prices inevitably rise.
Here is how they look today…
Kinross Gold Corp. (NYSE: KGC) is faring worse than the S&P 500 since the article was published. The rest have posted sizable gains for such a short time frame.
The real standout has been Osisko Mining Corp. (TSE: OSK). The cost of production at its flagship is amazingly low.
The company’s 2013 annual gold production hit 475,277 ounces at $760 per ounce. Fourth quarter gold production cost $713 per ounce.
No wonder GoldCorp initiated a hostile takeover and the CEO of Osisko slammed the offer.
The offer came in at $6 per share, and share prices are nearly $0.50 above it. Clearly the market agrees it was a laughable attempt.
Even the broad Market Vectors Gold Miners ETF (NYSEArca: GDX) outperformed the S&P 500 over the last two months by nearly 7%.
I don’t see any reason GDX couldn’t maintain its gains through 2014. Over the last year, it shed about 45% of its value through panic selling.
Annualized, the 6.29% gain over the last two months comes out to a little under 38%.
As for the smaller miners, do your due diligence, and keep your eyes out for companies that are viable at today’s prices and aren’t struggling to manage debt or cash flow.
Of course, you could also look at an inflation-proof alternative to fiat currencies. Nick talks about one such investment that’s up 4,327% over the last year in his Like Minded People newsletter…
