After a whole decade of depressed interest rates and inflation, inflation has increased significantly this year due to the unprecedented fiscal stimulus packages offered by the U.S. government in response to the pandemic. High inflation is a threat for bonds and many stocks, as it renders their returns less attractive. In addition, as inflation may rise even further, investors naturally wonder which stocks they should select.

Gold stocks and silver stocks have traditionally performed well during periods of high inflation, as these metals tend to appreciate significantly during such periods. In this article, we will discuss the prospects of three precious metals stocks, which are likely to offer protection to their shareholders in a scenario of high inflation.

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Royal Gold (RGLD)

Royal Gold is a precious metals royalty and streaming company that owns interest in some of the most attractive mines in the world. Its primary focus is the acquisition and management of precious metal stream and royalty interests. This business model provides exposure to higher metal prices and future product expansion while it limits downside thanks to limited exposure to operating and capital cost risks. In addition, the business model is highly efficient. The company has a market capitalization of $6.7 billion but it has only 28 employees. The majority of its revenue is generated in Canada, Mexico, Chile, and the U.S.

Thanks to the unprecedented fiscal stimulus packages offered by most countries in response to the pandemic, the price of gold rallied to a new all-time high last year. It then incurred a correction early this year but it has rallied again in recent months and remains much higher than its historical average price. This is a strong tailwind for Royal Gold.

In the most recent quarter, Royal Gold grew its revenue 19% over last year’s quarter and achieved earnings per share of $1.07, which exceeded the analysts’ consensus by $0.08. The earnings per share were lower than those in last year’s quarter but only due to an asset sale and a lower tax rate in that quarter. Given the sustained strength in the price of gold, Royal Gold recently raised its dividend by 17% and thus it is now offering a 1.4% dividend yield.

Royal Gold has a volatile performance record but it has grown its earnings per share at a 9.3% average annual rate over the last decade. A material growth driver for the upcoming years is the increasing production at the Khoemacau Project. Nevertheless, investors should be aware that the greatest determinant of the earnings of the company is the price of gold. As long as it remains elevated, just like it has throughout the last two years, Royal Gold will keep thriving.

Gold Resource (GORO)

Gold Resource is a producer of gold and silver. Until this year, it had operations in two mining units, in Oaxaca (Mexico) and in Nevada. However, in February, Gold Resource spun off its Nevada mining unit into a separately traded stock, Fortitude Gold (FRTT), in order to unlock shareholder value, as this mining unit currently has lower production but much higher growth potential than the mining unit in Oaxaca.

Gold Resource is greatly affected by the pandemic in two different ways. It was forced to shut down its mines for a few months last year due to social distancing measures, but it greatly benefited from the huge stimulus programs that most governments have implemented in response to the pandemic, as these programs have led the price of gold close to its all-time highs.

In the third quarter, Gold Resource was adversely affected by the ramp down of its operations in mid-August and early September due to the pandemic. However, the prices of silver and gold remained strong and offset this headwind. As a result, the company earned $0.02 per share.

As long as inflation remains elevated, the prices of gold and silver are likely to remain strong and thus they will continue providing a strong tailwind to Gold Resource. On the other hand, investors should be aware of the extreme sensitivity of the precious metals producer to the prices of gold and silver. The company suffered during the downturn in commodities in 2015-2016 and its earnings are still much lower than they were a decade ago.

Glencore (GLCNF)

Glencore is one of the largest commodity producers and traders in the world. It was formed by the merger of Glencore with Xstrata in 2013. The company smelts refines, mines, processes, and stores silver, copper, zinc, aluminum, nickel, cobalt, iron ore and other metals. While silver is the largest metal produced, Glencore is also a leader in several other areas.

It also has an energy and agricultural products segment. It is thus the most diversified in its peer group. Diversification is especially valuable in the materials sector, as a rising price of one commodity could potentially offset the impact of declining prices of most commodities during downturns.

Glencore has greatly benefited from the ongoing recovery of global economic activity from the pandemic, which has resulted in strong pent-up demand for commodities. In the first half of 2021, its adjusted EBITDA grew 79% over last year’s period, with its industrial segment leading the way, with 152% adjusted EBITDA growth.

While most commodity producers lack a meaningful competitive advantage, the unmatched scale of Glencore offers some efficiencies and a strong position in the trading business. Moreover, Glencore learnt its lesson well from the downturn in commodities in 2015-2016 and thus it has greatly reduced its leverage ratio (net debt to EBITDA), from 1.37 in the first half of 2020 to only 0.69. This helps explain the strong BBB credit rating of the company.

Overall, as a commodity producer, Glencore is highly sensitive to the cycles of commodity prices but it enjoys a dominant position in its business thanks to its unparalleled scale.

Final Thoughts

The rise of inflation this year, after a whole decade of depressed rates, has caused panic in the investing community. Gold and silver have traditionally provided a hedge against inflation and hence some investors have resorted to the precious metals. However, these metals do not offer any income stream while they have the cost of rolling over contracts every month. Therefore, investors may want to consider buying the above stocks, which do not have these disadvantages and offer some protection against inflation.