A real asset business that benefits from inflation

Sovereign Man provides actionable intelligence and rational solutions for personal liberty and financial prosperity. Read more at www.sovereignman.com

In the pantheon of human ingenuity, the development of iron and steel ranks up there with the discovery of fire and the invention of the wheel.

In fact, the advancement of human civilization would have been nearly impossible without iron—and the steel that it becomes.

Metallurgy (and agriculture) are ultimately what brought our ancestors out of caves and allowed them to build lasting settlements, many of which (Athens, Jerusalem, Delhi, etc.) still exist to this day.

Steel is still arguably the most important industrial commodity in the world. From railroads to skyscrapers, cars, bridges and electrical infrastructure, our modern way of life depends on steel.

This is why, when economies develop rapidly, one of the first things that happens is a surge in demand for steel, along with other essential commodities like copper, oil, and even food.

China experienced this surge in the early 2000s. India is going through it now.

This ongoing demand makes steel—and, by extension, iron—a ‘real asset’, i.e. a critical resource upon which human civilization truly depends.

We talk about real assets a lot— and they include certain commodities like steel, oil, copper, and gold, all of which serve vital functions. Agriculture and productive technology are also real assets. Water is a real asset.

And in an inflationary environment, these assets tend to perform exceptionally well.

We consistently make a very strong argument in this column that the future will likely be extremely inflationary.

After all, it seems like just yesterday that the US national debt hit $35 trillion. Yet it’s already closing in on $36 trillion. The budget deficit was $1.8 trillion last year, and the government’s own projections conservatively estimate $22 trillion in additional deficit spending over the next decade.

Technically, the situation is fixable, but it certainly doesn’t look like anyone in power is moving in that direction.

Realistically, the only “solution” will be for the central bank to print more money— potentially tens of trillions of dollars over the next decade.

As we saw during the pandemic, when the central bank expanded the money supply by $5 trillion, we got 9% inflation. How much inflation will we see if the Fed creates another $20 trillion?

No one knows for sure. But it probably won’t be zero.

Real assets, by the way, did very well during the pandemic. They also performed well during the stagflation of the 1970s.

And given that the world is looking at another major inflationary cycle, we believe that real assets are primed to outperform.

The good news is that a number of real asset producers are currently selling at absurdly cheap valuations.

We’ve said this before: while gold may be at an all-time high, many gold producers are extremely undervalued.

We think iron and steel companies are worth taking a look at as well given the importance of those commodities.

To give you an example, we wrote about one highly undervalued iron company to our subscribers of The 4th Pillar— our most exclusive premium investment research service.

This company has a unique business model because it isn’t actually a mining company; it’s a royalty company.

Owning and operating a mine involves a lot of work and risk. When the underlying commodity increases in value, the mining company generates more revenue. But inflation can also drive the costs of production higher as well.

But royalty companies don’t operate mines. They provide financing. And in exchange for providing financing, they get a cut of the revenue.

This is a unique model. Banks who provide financing receive a fixed rate of interest on their loans. Investors who provide financing receive shares in the company, i.e. a portion of the profits.

But royalty companies receive a percentage of top-line revenue… which means they will be major beneficiaries when inflation pushes up the prices for key resources like steel and iron.

This company in particular also trades at a low, single-digit price-to-earnings ratio, pays an 8% dividend, and has a solid balance sheet. We believe it has significant upside potential.

But it’s just one example of a regular theme at Schiff Sovereign: exposure to real assets can help inflation-proof your portfolio and your life.

Right now, many real assets are trading at historic lows, from gold miners to iron royalty companies to natural gas producers. Given the coming inflationary cycle, that’s probably not going to last.

Source

Sovereign Man provides actionable intelligence and rational solutions for personal liberty and financial prosperity. Read more at www.sovereignman.com

Source: https://www.schiffsovereign.com/trends/a-real-asset-business-that-benefits-from-inflation-151695/