Inflation Alert! Buy Gold Stocks to Protect Your Portfolio

Central banks want inflation so badly that the 2% inflation rate is no longer a goal. Gold is a good inflation hedge, so take advantage of the pullback to buy shares of companies like Yamana Gold Inc. (TSX:YRI)(NYSE:AUY).

| More on:
Gold bars

Image source: Getty Images

The U.S. federal reserve did something incredible this week. They tried to convince us that inflation, especially increased inflation, is a good thing. Even though many news outlets forecasted this eventuality, I still sat with my jaw hanging open when I heard it from the chairman himself.

I suppose it makes sense from their point of view. Global economies, including the U.S. and Canada, now have a ton of debt on their balance sheets. The increased debt loads are essentially liabilities that the central banks and governments have transferred from companies and individuals to public ledgers in an attempt to keep economies moving. 

It was no secret that many countries at all levels were highly indebted to going into the health crisis. We were in no shape to face a crisis, so the government stepped in to keep things going. 


There are basically three ways for countries to get rid of debt. They can tighten their belts and enforce austerity, pay back debt slowly with increasing domestic earnings, or inflate their way out of debt by increasing inflation, so countries can pay back debt issued with more expensive dollars with cheaper ones as inflation erodes the value of the earlier debt. 

Austerity is painful, as was seen in the case of Greece back in the early 2010s. No one wants to go through a painful period of less spending where standards of living are reduced and jobs are lost. In democratic nations, austerity can be political suicide.

The second way to reduce debt is through debt repayment based on improving economic conditions. At the moment, this possibility seems pretty impossible. We are going through a massive recession that could get worse in a hurry if government supports are reduced.

That leaves debt reduction through inflation. Essentially, this strategy comes down to governments debasing currencies through money printing. Debt borrowed in yesterday’s dollars is cheaper today since they become progressively cheaper as money-printing continues. 

Invisible tax

Although inflation is beneficial for the highly indebted, it is painful for anyone holding cash. Anyone who holds their savings in dollars is taxed by having their spending power taken from them by central banks. You lose purchasing power as your dollar decreases over time.

You can protect yourself by owning an asset like gold. Gold is considered to be a hedge against inflation. One piece of gold stays as one piece of gold. You can’t print more. So, as currencies lose value, gold increases relatively in value.

Gold stocks

If you believe that gold is an inflation hedge, it can pay to own gold stocks. Companies like Yamana Gold (TSX:YRI)(NYSE:AUY) are frequently dividend-paying organizations that are even starting to raise their payouts. Investors no less famous than Warren Buffett have begun buying into gold names, so you have to assume that there is potential for capital appreciation.

Many companies, Yamana included, are even raising their payouts. Yamana, for example, has raised its dividend four times over the past couple of years. Those increases amount to a total cumulative increase of 250% over the past year. At the current stock price, Yamana now pays a dividend of 1.22%.

If inflation is a thing, and gold prices continue to rise, then it is reasonable to assume that gold companies will continue to generate increasing earnings and free cash flow. In Q2 2020, for example, Yamana generated 60.3 million in free cash flow. That powered its dividends as well as $101 million in net debt repayments.

The bottom line

Inflation kills your savings, but it is a boon for the gold sector. It is wise to have holdings of gold companies like Yamana. Many companies are using their increasing free cash flow to do the right things such as increasing dividends and paying down debt. Those choices will pay off in a rising gold price environment and protect your investments from inflation.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Kris Knutson owns shares of YAMANA GOLD INC.

More on Investing

protect, safe, trust
Dividend Stocks

The 2 TSX Stocks to Buy for Decades of Safe Passive Income

Stable dividend stocks are common, but companies that you can safely hold in your portfolio for decades for their passive-income…

Read more »

woman data analyze

The Market Is Wrong About This 1 Value Stock

Restaurant Brands International (TSX:QSR) stock is getting cheap after the latest correction in shares.

Read more »

Airport and plane

Is Air Canada Stock Finally a Buy This Season?

When you are investing in a prospective recovery, it’s a good idea to watch for favourable industry trends.

Read more »

TFSA and coins
Dividend Stocks

TFSA Investors: How to Earn $2,500 Per Year on $40,000

Investors have an opportunity to secure high yields while reducing risk in their TFSA portfolios.

Read more »

Illustration of bull and bear

A Bull Market Is Coming: 3 Growth Stocks That Could Thrive

These growth stocks all trade undervalued and have tonnes of long-term potential, making them some of the best to buy…

Read more »

Volatile market, stock volatility
Metals and Mining Stocks

Weathering Volatility: Strategies for Success With TSX Stocks

The key to handling volatility is changing your asset mix. For example, if you suspect a market downturn, you can…

Read more »

Path to retirement
Dividend Stocks

Retirement Wealth: 2 Top Dividend Stocks for TFSA Investors

Parking a sizable portion of your savings in reliable dividend stocks is a time-tested wealth-building strategy appropriate for a wide…

Read more »

sale discount best price
Tech Stocks

2 Growth Stocks to Buy Every Time They Go on Sale (Like Now)

The right growth stocks are worth buying in almost any market, but they are especially attractive when they come with…

Read more »