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Survive the Inflationary Storm

Five Trades That Could Potentially
Double in the Next 24 Months
The Fed and other Central Banks have finally unleashed inflation.

It took over 600 interest rate cuts, seven years of “free” money and some $14 TRILLION in
Quantitative Easing (QE), but inflation has finally arrived in the financial system.

This initial shift began in 4Q16. At that point we witness a sudden spike in inflation
expectations.

This is a global phenomenon. As I write this, inflation has begun to spike in Japan, Germany,
Sweden, Mexico and more.

This is just the start. As history has shown us time and again, once the inflation genie is out of
the bottle, it’s almost impossible to get it under control.

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Take a look at the US.

The Fed tracks FOUR inflation metrics. They are Core CPI, Core PCE, Trimmed Mean CPI and
Cleveland Median CPI.

Of these four, THREE are already above the Fed’s target rate of 2%.

• Core CPI is growing at an annualized rate of 2.5%.

• Cleveland Median CPI is growing at an annualized rate of 2.9%.

• Core PCE is at the Fed’s target rate of 2%.

• Only trimmed Mean CPI is below the Fed’s target rate at an annualized rate of 1.88%

This is just the beginning. The fact is that the Fed’s inflation measures are actually TERRIBLE at
predicting inflation.

You don’t have to take my word for it. The Fed itself has admitted this!

In a little known paper published back in 2001, the Fed admitted openly that its official
measures of inflation (CPI and PCE) do a horrible job of predicting future inflation.

So what does predict future inflation accurately?

FOOD prices.

We see that past inflation in food prices has been a better forecaster of future
inflation than has the popular core measure…Comparing the past year’s inflation in
food prices to the prices of other components that comprise the PCEPI (as in Table 1), we
find that the food component still ranks the best among them all…

https://www.stlouisfed.org/publications/regional-economist/january-
2002/predicting-inflation-food-for-thought

I want you to focus on these two admissions:

1) The Fed has admitted that its official inflation measures do not accurately predict future
inflation.

2) The Fed admitted that FOOD prices are a much better predictor of future inflation. In

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fact food prices were a better predictor of inflation than the Fed’s PCE, non-durables
goods, transportation services, housing, clothing, energy and more.

Put simply, if you want to predict inflation well… you NEED to look at food prices.

The process of tracking food prices begins with agricultural commodity prices: wheat, soy
beans, lean hogs, sugar, rice, and the other stuff that is used to make “food.”

With that in mind, agricultural commodity prices look to be bottoming/ breaking out of a
massive falling wedge pattern that has been developing over the last THREE years.

Even more bullish, RJA put in a base (red line) and is now set MAJOR move higher.

THIS CHART PREDICTS A 40% INCREASE IN FOOD PRICES

Put simply, this chart is SCREAMING that inflation is coming to the US within the next 12
months. Smart investors are preparing now for this with targeted positions.

Below are my five inflation plays of choice. All of them have the potential for triple digit gains.

Play #1: The Gold Mining ETF (GDX)

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Our first Gold mining play is the Gold Mining ETF (GDX).

GDX is a diversified play on the entire mining sector.

At $10 Billion this is one of the largest ETFs on the market. And it gives you exposure to 52
mining plays ranging in size from multi-billion dollar mining giants like Newmont Mining to
smaller plays like Sandstorm Gold.

All told, the companies that comprise GDX own a whopping 25 million ounces of Gold. With
gold around $1200 an ounce, you’re talking about $30 billion worth of Gold at market value.

However, GDX’s entire market cap is less just $10 billion. Put another way, the stock market is
currently valuing GDX’s gold assets at just $400 per ounce!

The value here is incredible, and due to its diversification, GDX should be the backbone of your
exposure to the mining sector.

However, I want to stress that this play, like all mining plays, IS volatile. It is not unusual for
GDX to swing 5% in a single day. A 10% move in a single week is common.

So be prepared to weather some volatility here. This is a “buy and hold” play that will feature
short-term bumps for MAJOR long-term gains.

Indeed, based on where Gold is going, GDX could potentially rise 100% in the next 24 months.

Action to Take: Buy the Gold Mining ETF (GDX).

Play #2: The Gold Mining Junior ETF (GDXJ)

Our second Gold mining play is the Gold Mining Junior ETF (GDXJ).

GDXJ is quite similar to GDX, except it focuses on junior gold miners (mining companies with
market capitalizations of $250 million or less).

Individually, gold mining juniors are HIGHLY risky investments. Many of them are “pie in the
sky” companies where there is no guarantee that they will be able to deliver on their potential
reserves.

On top of this, gold mining juniors are often based in politically unstable regions where it’s not
uncommon for civil unrest to disturb operations, and lead to serious losses of capital.

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This is why I prefer GDXJ instead of individual junior plays.

GDXJ is a large ($4 billion in net asset value) ETF that gives you broad exposure to the junior
mining sector. All told, GDXJ has holdings in some 54 junior mining plays.

This diversification provides greater stability. Because it is so broadly invested, no single
individual mining company can result in your capital being completely wiped out. Put simply, in
terms of risk, this is about as risk averse as you can get in the junior mining sector.

But don’t let the diversification fool you. GDXJ is built like a hot rod with the potential for rapid
and massive gains. During the last bull market in Gold, GDXJ rose an astonished 100% in a
single year.

Put simply, GDXJ is like the Gold Miners ETF on steroids.

However, these massive moves come at a cost. GDXJ is EXTREMELY volatile. It is not uncommon
for GDXJ to move 10% in a single day.

So make sure you’re prepared to weather some SERIOUS volatility here.

However, the potential gains more than make up for this. Based on where Gold is going, GDXJ
could potentially rise over 200% in the next 24 months.

Action to Take: Buy the Gold Mining Juniors ETF (GDXJ).

Play #3: Royal Gold (NGD)

Our third Gold mining play is Royal Gold (RGLD).

RGLD is a Gold royalty company. What this means is that RGLD supplies capital to Gold miners
in exchange for a percentage of those companies’ Gold sales.

The beauty of this arrangement is that RGLD experiences little of the operational risk/costs
associating with mining. As a result of this, RGLD has lower costs and higher margins that most
miners…and most S&P 500 companies: as of June 2018, RGLD’s gross margins were 80%,
placing it in the top 6% of S&P 500 companies.

As of mid-year 2017, RGLD has 39 producing properties with another 22 properties in
development. And thanks to its low costs and higher profit margins, RGLD pays out a nice
dividend that it has increased for the last 17 years. As I write this, RGLD’s dividend is 1.1%.

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Don’t let that safety fool you though. Based on where Gold is going, RGLD could potentially
double in the next 24 months.

Action to Take: Buy Royal Gold (RGLD).

Play #4: Wheaton Precious Metals (WPM)

During periods of high inflation, Silver dramatically outperforms Gold.

Consider that during the first leg up for precious metals’ bull market (2001-2011) Gold rose
468% while Silver rose an astounding 948%.

For that reason, we need to have some exposure to Silver during the next Bull Run in precious
metals.

Our first Silver play is Wheaton Precious Metals (WPM)

WPM is a precious metal “streaming” company. What this means is that rather than mining for
precious metals itself, WPM arranges to buy Silver and Gold from mining companies at a set
price.

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Here’s how it works. Metals ore is often polymetallic.

What this means is that you will find multiple metals in the ore. In the case of Copper, there are
usually small amounts of Gold and Silver also present in a particular resource.

WPM offers to buy this Gold or Silver from these companies at a set price, usually in two
installments (one large payment upfront with additional “delivery” payments when the mining
firm delivers the Gold or Silver).

In this setup, the Copper miner gets additional capital for operations, and WPM gets exposure a
relatively steady stream of Gold or Silver production with minimal investments.

In the very simplest of terms, WPM gets all of the upside potential to precious metals mining
(owning Gold and Silver that can both rise rapidly in value) with virtually none of the risk
(WPM doesn’t actually own a mine and so is not exposed to high operating costs, capital
requirements or the like).

It’s as close as you can get to a “risk-free” investment in Silver.

WPM has this sort of agreement in place with 17 actively producing mines and nine
development stage projects. It is the single largest metals streaming company in the world.

However, the potential gains more than make up for this. Based on where Silver is going, WPM
could potentially rise 115% in the next 24 months.

Action to Take: Buy Wheaton Precious Metals (WPM).

Play #5: SSR Mining (SSRM)
Our final play is SSR Mining (SSRM).

SSRM is a traditional precious metals producer with three actively producing properties
located in the US, Canada, and Argentina. Two are gold producers the third produces Silver.

SSRM has another eight properties in the pipeline: two in development and six more in
exploration.

In 1Q18, the company produced 78,000 ounces of Gold equivalent. The company expects to
produce another ~250,000 in 2018 with an average cash cost around $735 per ounce of Gold
equivalent.

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On top of this, the company has a rock solid balance sheet with $460 million in cash and cash
equivalents and another $114 million in marketable securities. The company is also incredibly
cheap for a precious metal miner with an Enterprise Value/ EBITDA ratio below 6.

Based on where Silver is going, SSRM could potentially rise 200% in the next 24 months.

Action to Take: Buy SSR Mining (SSRM).

Based on where Gold and Silver are heading due to inflation these plays offer us the potential for
triple digit gains. I suggest taking a portfolio approach to them, spreading capital across all of
them instead of piling into a single one.

However, if you HAVE to pick just one or two plays, I would focus on the ETFs (GDX and GDXJ).
However, those plays as well as the rest will be volatile. It is not unusual to see them move as
much as 10% in a single week. So be prepared to stomach some volatility as the next bull market
unfolds.

This concludes this report. Thank you for reading.

Best Regards,

Graham Summers
Chief Market Strategist
Phoenix Capital Research

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