Inflation is the general upward creep of prices that slowly erodes the buying power of a dollar. A great example is the price of a U.S. postage stamp, which was $0.02 in 1900 and stood at $0.33 100 hundred years later. Often, however, inflation moves much faster than that. If you're worried about protecting your purchasing power right now, you'll want to watch Silver Wheaton Corp. (USA) (NYSE:SLW), Barrick Gold Corporation (NYSE:GOLD), and, even more directly, iShares Gold Trust (ETF) (NYSEMKT:IAU).
The other inflation hedge
When people think about inflation hedges, the first thought is usually gold. However, silver is another precious metal that's historically been used as a store of wealth. And one of the best ways to invest in the silver mining sector is through Silver Wheaton. The company isn't a miner, but that's why you should like it.
Silver Wheaton provides upfront financing for miners so they can complete mines without tapping capital markets or dealing with banks. Miners repay Silver Wheaton by selling it physical silver (about 60% of revenues) and gold (40%) at very low prices. This is called streaming in the industry, and it means Silver Wheaton never gets its hands dirty.
Silver Wheaton's average cost for silver is around $4 an ounce, and its gold costs average around $400 an ounce. That's well below current market prices, which are, in turn, well off their recent historical highs. Thus -- and this is the best part -- Silver Wheaton sports huge operating margins even during difficult periods. When commodity prices are high, meanwhile, its margins border on obscene (operating margin was nearly 77% when gold and silver prices peaked in 2011).
This is why Silver Wheaton can remain profitable even when its mining partners are bleeding red ink. And it's also why this company should be high up on your inflation protection watch list.
If you're a purist, then nothing but gold will do for your inflation-fighting needs. While there are plenty of gold miners around, one of the largest and most prominent is Barrick Gold. This miner's operations are generally cheap to run, with an all-in sustaining cost of around $865 an ounce in 2014. That puts it at the low end of the cost curve for miners, which is a good place to be in a commodity business.
That said, Barrick made some mistakes when gold prices were peaking in 2011, investing in projects that haven't panned out as planned. Those decisions cost investors a lot money via write-offs. For example, the on-hold Pascua-Lama project led to a $6 billion asset impairment charge in 2013. And that wasn't the only investment that went awry.
However, Barrick is moving past those overzealous times and is again focusing on its core mission of running cheap gold mines well. That means it should be in solid position to participate if gold rallies because inflation heads higher.
A more direct approach
For investors who don't want to bother with a streamer or a miner, that leaves directly purchasing gold. You can do that with gold bars and coins, but it's a hassle. That's why you might want to consider an exchange-traded fund like iShares Gold Trust.
This fund's main asset is gold. In fact, it publishes a list of the gold it owns on its home page. Thus, as gold goes, so goes the price of iShares Gold Trust. You can't hold the gold in your hand, but this is a pretty convenient way to quickly get some protection from the ravages of inflation.
Now, to be fair, iShares Gold Trust isn't really a stock, but that's a benefit here. Indeed, gold and silver stocks usually move in tandem with silver and gold prices, but not always. So if you want a more direct tie, this ETF is a good option.
Inflation in the cards?
You can't predict the future, of course, but one thing has been pretty constant through history -- a dollar today will buy less tomorrow. If you want to protect yourself from the often insidious ravages of inflation, you will want to watch these three investments, which may all help protect you from the impact of rising prices.