Some industries cope with inflation better than others. So if you're looking for a company that will perform well during inflation, you want to find one that can pass off rapidly rising input costs -- such as energy, commodities and labor -- to consumers via higher prices.
Notice I used the word "cope" because, at best, high inflation is a nuisance and at worst, it's a nightmare. And that all depends on the effect of price hikes on consumer demand; known as price elasticity of demand in economic jargon.
But if you own stocks in the precious metals streaming industry, high inflation is always welcomed with open arms.
The Business of Streaming
As a prelude to any specific stock talk, it's important to understand the precious metals streaming industry; an industry I believe will benefit the most in an inflationary environment.
Metal streaming companies aren't actual miners. Instead, a streaming company buys a miner's metal before the miner even takes it out of the ground. The mining company then uses that upfront payment to grow the company, pay down debt or perhaps fund the purchase of a new Italian sports car for the CEO.
Here is how the money flows:
So what's in it for the streaming company? They're offered the opportunity to purchase a predefined percentage of the goodies mined at a fixed price (usually well below market value, especially in periods of high inflation) until production ceases on the mining project. The streaming company will then turnaround and sell the metal at market value for a profit.
Designed for Inflation
But here's the good part. Remember, I made the point that in periods of high inflation most companies are forced to "cope" with rising input costs. Not so for the precious metals streaming companies.
After all, the streaming company doesn't pay any laborers or buy fuel for gas guzzling trucks; it's the precious metal miner who incurs those costs. The streaming company's operating costs are fixed and thus do not rise with inflation.
But what will rise with inflation is the value of the metal the streaming company already bought at a fixed cost. And as the difference between the buying and selling price increases, profits of the streaming company will soon follow.
My Top Inflation Stock
With that being said, now it's time to reveal my ultimate inflation stock and, as you may have guessed, it's a precious metal streaming company.
The company is Silver Wheaton (NYSE: SLW). Silver Wheaton is currently purchasing silver from various mining companies at a fixed cost of roughly $4 an ounce and then turning around and selling it at the current market price, which recently stood at nearly $34 an ounce. It's a rather sweet deal, if you ask me.
And just imagine what profits might be if silver shoots the moon in response to an expansionary monetary policy (a fancy phrase for inflation).
[InvestingAnswers Feature: My Favorite Way to Own Silver Today]
There are risks to consider. It should be noted while inflation is a streaming company's best friend, deflation is its worst enemy. In deflationary environments, streaming companies can end up buying high and selling low if the price of metals falls. So what are the odds of deflation occurring these days? The Federal Reserve Bank of Atlanta says it's only 17.1%.
The Investing Answer: Now that you understand how Silver Wheaton makes money, you might consider adding it to your portfolio as a hedge against inflation.
As a bonus recommendation, check out Sandstorm Gold (OTC: SNDXF.PK). It has the same basic business model as Silver Wheaton except Sandstorm Gold buys, you guessed it, gold. And it just so happens that Sandstorm's current CEO was Silver Wheaton's former CFO -- the guy seems to be as sharp as a tack.
A word of caution, Sandstorm Gold trades on the pink sheets, meaning it's not listed on an exchange and therefore is not subject to the reporting requirements of an exchange-traded stock. This makes Sandstorm a riskier investment than the exchange-listed Silver Wheaton.