Rampant inflation seems likely at some point in the future, as demand for commodities increases and the pain of running the government's printing press full time comes back to haunt us. So once again I am revisiting Anglo American ADR (NASDAQ: AAUK). How can you protect yourself against the pain of inflation? One thing to remember is that although cash is king -- as we are told every day -- cash will not perform well in a highly inflationary environment. What usually performs well are things that you can hold in your hand, that you can touch and that other folks want.
Now that I want to buy things, what kind of things do I want to buy? How will I know what things to buy? Where will I put these things? What if I buy the wrong things?
From my perspective the answer to all of these questions can be found in AAUK, which I most recently wrote about five weeks ago Chasing Value: Anglo American on sale.
Since the company has mining operations on six continents and owns reserves in most every natural resource, precious and not, you will be diversified geographically and in breadth of resources -- things, that is, things people want.
Of course, people do not want them as bad now as they wanted them last year and the stock has been crushed because of it. However, they will want them again even more in the future when the global competition for natural resources heats up again, and between the demand and the anticipated inflationary pressures AAUK at least has a chance to regain its former standing.
At yesterday's closing price of $10.55, it is trading 71% off its 52-week high of $36.37. If the market merely stabilizes, the stock could double. In the meantime, like many of my recommendations, it pays a nice dividend of 5.45% for your trouble.
Anglo American is currently reshaping the company to fit within the constraints of today's economic situation. In checking its debt levels, I learned that both long term and short term debt are far less than the industry average. While they are shuttering certain operations, they are on the prowl for possible acquisitions too -- or might even become one. And the company is trading close to book value.
Finally, if you appreciate the ironic, consider this: we joke about hiding our money in the ground because we no longer trust the government or banks; if you own AAUK, a majority of your assets will already be there.
Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of AAUK.
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Reader Comments (Page 1 of 1)
12-10-2008 @ 5:03PM
blogs11111 said...
Seems to me the real problem here is deflation and deleveraging on all levels, like back in the Great Depression. In this situation assets lose value and it becomes a spiraling down problem. So why would someone hedge against inflation when deflation is what we have going on? Also, if someone wanted to hedge against inflation wouldn't they buy oil? Something we have to have. Gold might be a want but it sure isn't a need. People have stopped buying all but the necessities, I don't see that changing for a decade (just like in Japan). If people do start hedging against non existant inflation it will be in oil and that will cause further collapse and deeper deflation. Can't eat gold.
12-10-2008 @ 5:59PM
Sheldon L said...
Mr. 1's
You make some good points. Here is some food for thought.
1) AAUK is about more than gold. It is also about coal, lumber, copper, nickle and other basics. It is this broad range of natural resources that I think makes it a good bet.
2) While a deflationary period is probable for a while, even years, it will be followed by stabilization, growth in China and India and then inflationary pressure as the currency float and demand for resources affect the global economy.
3) I do not believe it is possible to increase the currency in circulation by trillions of dollars with no repercussions.
4) We might have deflation in wages and inflation in commodities at the same time -- a very scary thought.