It’s no secret that governments have relied on extraordinary monetary policy measures to spur economic growth following the global financial crisis. While central banks have traditionally used their interest rates to control growth, lowering them to encourage borrowing, these tools aren’t very effective when interest rates are already hovering at record lows of nearly zero percent.
Instead, central banks began buying government bonds and other illiquid assets – such as mortgage-backed securities – in order to inject liquidity into the market. By purchasing these assets in a scheme known as quantitative easing, the banks essentially increased the currency supply, decreased currency prices, and boosted export competitiveness at the same time.
Cheaper exports have translated to more income for many corporations, which have been evidenced by record cash balances on their balance sheets. But, while this was supposed to translate to hiring, the employment situation has been slow to recover. And as a result, the working class population has had to deal (or will have to deal) with higher real inflation.
Quantitative Easing Isn’t Over
In January, Japan’s new Prime Minister, Shinzo Abe, announced a US$117 billion fiscal stimulus package to boost its growth by spending more on public works, disaster recovery and small businesses. Mr. Abe plans to combine this spending with a “daring monetary policy” to “beat deflation” and “curb the yen’s appreciation”, according to comments made at that time.
More recently, reports have surfaced that Japan’s government is likely to nominate Asian Development Bank President Haruhiko Kuroda as its new central bank governor. Mr. Kuroda is a well-known advocate of aggressive monetary easing and is expected to push for further depreciation of the yen versus other major currencies in addition to the spending.
Since these actions will result in higher currency valuations for other countries relative to the Japanese yen, some investors are concerned about a so-called “currency war”, or competitive currency devaluations. In fact, the G7 issued a rare statement in late-February that acknowledged the problem and discouraged countries from starting one.
Protecting Yourself From Inflation
Inflation has yet to reveal itself, judging by measures like the Consumer Price Index, with Ben Bernanke’s term seeing just 2% annual inflation on average. But, that’s likely because growth hasn’t picked up yet, and things could quickly change when the economy turns around, especially if central banks aren’t quick enough to respond by raising interest rates and reversing quantitative easing programs.
Those looking to protect themselves from this potential inflation often look towards gold as a reliable alternative. Since quantitative easing began in 2007, gold prices have risen from well under $1,000 per ounce to more than $1,600 per ounce. Prices have moderated in early 2013, due to a shift into equities, but the precious metal remains the most popular protection.
Gold can be purchased in a number of different ways. Physical gold exposure is easiest to purchase using the SPDR Gold Trust (NYSE:GLD), but the exchange-traded fund is down nearly 10% over the past 52-weeks. Gold producers like Goldcorp Inc. (NYSE:GG) and Barrick Gold Corp (ABX) have fared even worse, trading down 30% and 35%, respectively.
Buying Gold Bullion Directly
Rather than buying gold producers, exchange-traded funds, or commodity futures contracts, PMX Communities Inc. (PMXO) offers consumers an easy way to purchase physical gold bullion through a gold dispensing terminal without worrying about brokerage accounts, margin requirements, or production delays and other factors associated with producers’ stock.
Re-launched in January of 2013, the company’s gold dispensing terminals sell 24 karat .9999 gold bullion bars and coins with unique designs that are customized based on the machine’s location. Ranging in price from $99 to more than $799, the gold serves as souvenirs for tourists, collectibles for collectors and an easy way to beat inflation for the general public, and can be purchased with a simple swipe of a their credit or debit card.
The company already has 1 machine in place at the Town Center mall in Boca Raton Florida, has announced plans for a second terminal to be up and running soon, and has plans to have 10 terminals operational by the end of the year. With two U.S. Provisional Patent Applications and an International Business Method Patent, the company may also soon have exclusive rights to unattended precious metal distribution systems, methods and apparatuses, limiting competition.
Investing in PMX Communities
PMX Communities represents an attractive investment opportunity of its own that may also provide a hedge against inflation. Since the company’s gold bullion sales will presumably rise with expected inflation, investors can benefit from capital gains appreciation on the stock itself and offset the impact of higher inflation on their other assets.
With 20% to 25% built-in operating margins that change when gold moves up or down 10%, the company’s business model could generate attractive cash flows. And, the hands-off nature of automated gold dispensing machines could also result in relatively low overhead costs and a highly scalable product that could quickly and easily move into new markets.
Disclosure: The subject security is a client of Emerging Growth, LLC. For full financial disclosures for all Emerging Growth, LLC clients, please visit http://secfilings.com/Disclaimer.aspx
- Investment & Company Information
- quantitative easing
- interest rates