We know a fellow who built a gold mine. Whenever we mention this, people usually ask what it was. The answer is…a gold mine. This client worked as a construction superintendent for a very large contractor. He had built coal mines and a gold mine among many other large projects.

This anecdote comes to mind as we prepare to tell you our latest thoughts on investment tactics. We invest time every week looking for the best bargains, trying to figure out emerging trends, thinking about the economy and the markets. In a recent research meeting, Greg Leibman posed the question, “What can we own that might benefit from rising inflation?”

We humans tend to think that recent conditions or trends will persist. This makes it hard to realize the long spell of very low inflation might come to an end, with inflation outpacing expectations.

One way to weather periods of rising inflation is to invest in companies that own things: land, buildings, factories, raw materials, and so on. An oil company already owns the oil in their reserves and the wells to pump it; when prices go up, they get to sell it for more profit but most of their capital expenses have already been baked in.

Miners similarly benefit when the prices of their existing mineral reserves go up. Like oil companies, their stock price tends to move in correlation with natural resource prices, making them a potential inflation hedge. Some mining companies have exposure to the gold market, which some people may see as a particularly important hedge against inflation.

We have had raw material companies on our radar for some time now: they tend to be big cyclical movers, and we have been bullish about the current cycle so far. But we believe that this same sentiment may have created buying opportunities in the mining sector.

We look for potential gaps between expectations and the unfolding reality. That is where profit lives, in our opinion. When Greg posed the question, we put our heads together and started looking at potential opportunities. To summarize,

• Inflation may exceed expectations in the years ahead.
• We believe that some companies within the mining sector are at bargain levels.

There are no guarantees. What we think of as bargains sometimes have the dismaying tendency to get cheaper after we buy them. But we think we have identified potential investment opportunities that may be appropriate for some portfolios. Clients, if you would like to talk about this or anything else, please email us or call.

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The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.

The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.

The fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.

Because of their narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies.