This week has been dominated by falls in share prices across the globe caused by raised inflation expectations. It would be unsurprising for there to be more volatility as investors continue to adjust their forecasts for inflation.
With Donald Trump’s tax and spending policies yet to have their full impact, coming to terms with higher inflation could be a challenge for investors across the globe. And with the prospect of uncertainty in the UK caused by Brexit, the issue could be more acute for domestic investors.
Given the changes being made in the US to taxation and spending, it is not a great surprise that higher inflation could be ahead. However, recent data from the US suggests that the timing and pace of increase in the rate of inflation could be more severe than previously anticipated. In response, the Federal Reserve may be required to adopt a more restrictive monetary policy. This could hurt GDP growth prospects, as well as employment figures in the US.
Of course, higher inflation has historically meant that investors seek assets which are viewed as being superior stores of wealth. One example is gold, with the precious metal having a long track record of increased demand during periods of higher inflation.
However, countering this is the potential for rising interest rates in response to higher inflation. As was seen in the latter part of 2016, investor sentiment towards gold can decline significantly if higher interest rates are expected in future. Therefore, just because there is set to be a period of higher inflation does not necessarily guarantee a higher gold price.
Working in gold’s favour, though, is the difficulty facing the Federal Reserve in terms of staying ahead of the curve when it comes to rising inflation. On the one hand, policymakers are likely to seek to cool inflation through a less accommodative monetary policy. But on the other hand, they will not wish to be too far ahead of the curve and end up stifling economic growth. This latter view may take precedence unless inflation quickly rises to substantially higher levels.
With the potential tailwind from higher inflation and the increased demand it could create, the gold price may perform well in future. Therefore, gold miners such as Randgold Resources* (LON:RRS) and Polymetal (LON:POLY) could be worthwhile investments. The performance of both stocks has historically been closely linked to the price of gold. With them making improvements to their business models, they are forecast to grow EPS by 37% and 10% respectively this year.
Randgold Resources it has a large net cash position and will look to return excess cash to investors.
This should mean that higher dividends are ahead, which could help UK investors in particular to beat inflation. In fact, in the case of Randgold Resources it has a large net cash position and will look to return excess cash to investors. It raised dividends by 100% in 2017 and further growth of 39% is expected this year. With Polymetal yielding 5%, it could also prove to be a sound means of beating inflation over the coming years.
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* Robert Stephens owns shares in Randgold Resources.