Consumers and investors are bracing for higher prices. Inflation is already higher than historic averages, and some experts believe it could remain elevated for the foreseeable future. The problem, some believe, is that governments have printed too much currency during the crisis. That devalues the buying power over time.
Canada’s inflation rate has already climbed to 3.4% in April 2021. The Bank of Canada sees this as a persistent near-term trend, which means investors need to prepare their portfolios for it right away. Here are the top two companies that could offer some protection.
Inflation winner #1
Gold is considered a safe haven during periods of high inflation. Investors and sovereign nations tend to add more gold to their balance sheets when the value of their currency is eroded. Russia, for instance, has been actively adding to its gold deposits over the past five years and has abandoned its U.S. dollar position this year.
The price of gold surged during the previous inflationary cycle in the 1970s. The price of a single ounce has also jumped 48% over the past five years.
If gold appreciates further, gold miners should benefit. Barrick Gold (TSX: ABX)(NYSE: GOLD) is a clear winner from this trend. The stock has doubled in value over the past three years. If inflation and gold prices remain elevated, the miner’s profit margin could expand further. This gives the company more room to expand production or reward shareholders.
Barrick Gold is currently trading at a price-to-earnings ratio of 16.6. That makes it an attractively undervalued proxy for gold. It’s also an ideal inflation hedge. Investors worried about rising prices should consider a position in Barrick Gold.
Inflation winner #2
Raw materials and commodities are at the forefront of any price escalation. Inflationary pressures impact this sector first. That makes Canadian Natural Resources (TSX: CNQ)(NYSE: CNQ) an inflation hedge.
Canadian Natural Resources has seen an immense surge in commodity prices over the past year. That’s been reflected in the stock price. CNQ stock has surged 271% since March 2020. Despite this surge, the stock offers a hefty 4% dividend yield. It also trades at a price-to-earnings ratio of 24.
If inflation remains elevated, the underlying commodities CNR supplies should see further appreciation. The management team is already forecasting a stellar year ahead. Their forecast suggests the company could generate $5.7 billion to $6.2 billion in free cash flow this year provided WTI crude remains above US$60 per barrel.
Bottom line
A new era of inflation is upon us. Consumers and investors should brace for higher prices on ordinary goods. That means the value of your currency will be steadily eroded in the years ahead. Most companies struggle to keep up with inflation, but some actually benefit.
Gold miners like Barrick Gold and commodity-based businesses like Canadian Natural Resources are clear winners if inflation remains elevated. Investors should consider adding exposure to these inflation-hedges if the decline of purchasing power is on their mind.
