How Battery Metals Have Helped Us Outperform During the Slump in Gold Price

Gold hasn’t been getting much love from investors lately due to rising bond yields, and bullion-backed gold mutual funds and ETFs have seen significant outflows so far this year through the end of February.

Before pulling your money out, though, I would advise investors double-check what’s in the fund. During this period, we’ve managed to outperform many of our peers thanks to a substantial rotation into metals and minerals that will increasingly be needed in advanced technology, including lithium-ion batteries. Besides lithium, we like copper, nickel, cobalt and graphite, and we see great upside potential in companies that not only produce these minerals but also develop the technology behind the batteries.

Further down, I’ll be sharing one of these companies with you and how it’s helped us outperform during the gold correction.

Record-Setting Money Printing Increases the Attractiveness of Hard Assets

First, I think it’s important for me to say upfront that we still have strong conviction in gold and believe one of its most convincing long-term investment cases is the alarming growth in money supply in the U.S. There are different ways to define “money,” but let’s look at highly liquid M1, which includes cash outside the U.S. Treasury, money market deposit accounts and other forms of so-called “near money.”

As you can see, the amount of cash floating around the economy is up a head-spinning 355% compared to last year. This is a record rate, and it’s not even close. To combat the economic impact of the pandemic, policymakers flipped on the printing machines and never bothered to shut them off, flooding the U.S. with easy money.

Record Money Printing in the U.S.
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The law of supply and demand may apply to currencies just as it does to any other asset. This extra liquidity has helped prop up the economy and lift stock prices, but an unintended consequence could very well be dollar depreciation—suggesting inflation may not be too far behind.

When and if that happens, I think investors with exposure to gold and gold mining would be in a much better position than those without. Historically in times of accelerating inflation, the yellow metal has improved portfolios’ risk-adjusted returns and delivered positive returns, according to the World Gold Council (WGC).

Is Inflation Already Here?

Inflation expectations over the next five years have risen to their highest level since 2011. Below you can see the five-year breakeven rate, which represents a measure of expected inflation derived from nominal five-year Treasury bonds and inflation-adjusted five-year bonds. In short, it tells you what market participants believe inflation will look like in the next five years. On Tuesday, March 2, the rate hit 2.4%, the highest reading since May 2011.

Inflation expectations over next five years are the highest since 2011
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