Although the energy heavy Rogers Raw Materials Index was down 1.03% last week, everything I’m looking at suggests we are facing inflationary headwinds.

My IDW shown below hit another new high at 176.45. Driving my IDW higher this past week were the Housing Index (+6.39%) and the China Stock Index (+6.12%); Silver posted a 2.99% rise as well, and Gold picked up a bit too. But this is a stagflation story more akin to but likely much more severe than that of the 1970s.

The chart below on your left is from the Wolf Street report dated January 22, 2021, and shows the massive decline in jobs, which means prices are rising not because of healthy economic demand.

What is leading to inflation if the economy is so weak? Well first off, supplies are being reduced because government is forcing people to stay home and not produce. An example that I see related to this letter is mostly in Canada, where, because of COVID-19, there is a shortage of lab workers—resulting in massive delays in assays for drill results. No doubt there are workers doing overtime and getting paid more. Companies are forced to pay more to push their assays at the front of the line if they feel they need them to continue their work. No doubt labs are having to pay more for overtime from employees. Transportation costs are rising too, given COVID-19. There are reports that people are beginning to hoard for fear of higher prices in the future. These are all signs of what I experienced as an investor in the 1970s. 

Moreover, as in the 1970s, massive amounts of money are being printed to try to “fix” the problem, which not only creates an artificial demand but also leads to panic buying as people seek to buy now for fear things will cost more in the future—which turns out to be a self-fulfilling prophecy and a policy that negates a return to market equilibrium.

The following is an excerpt from the Wolf Street report by Wolf Richter that you can read in its entirety here: https://tinyurl.­com/y5wgnf36 .

Food inflation – which the Fed ignores in its core PCE inflation measure – is off to a good start. Prices for wheat, corn, and soybeans have spiked to levels not seen in over six years amid strong export demand from China and low US stockpiles. Rising prices of agricultural commodities raise the input costs for food producers, which are already passing on those costs in form of higher retail prices for consumers.

Construction materials too, amid shortages due to the current land rush underway, as high-rise dwellers in some expensive cities are suddenly trying to buy or rent a house in the suburbs or the countryside, and homebuilders have jumped on board.

Lumber prices started spiking last June and hit all-time records in August and September, amid huge volatility, and nearly matched that record at the end of December. Though prices have backed off a tad in January, they still exceed all pre-August records.

“Lumber shortages are starting to bite: 31% of contractors report a current lumber/wood shortage, up from 11% last quarter,” according to the Q4 2020 US Chamber of Commerce Commercial Construction Index. More broadly, 71% of contractors reported some shortage in building products and materials, up from 54% in Q3, particularly steel, electrical products other than copper wire, and lighting products. Contractors also reported a skilled labor shortage, with 83% reporting “moderate to high levels of difficulty in finding skilled workers.” As I noted above, the Housing Index posted a huge gain this past week. No doubt surging lumber prices are a part of that story.

As costs are beginning to rise, how might that impact our mining projects? I noted above the impact on assays from labs but if materials costs start to rise dramatically, then we need to see the prices sold in the market rise by at least as much. If energy prices begin to surge, then it would stand to reason that higher grade, lower tonnage projects would generally be in a stronger position than very-very-low-grade bulk-minable operations.

About Jay Taylor

Jay Taylor is editor of J Taylor's Gold, Energy & Tech Stocks newsletter. His interest in the role gold has played in U.S. monetary history led him to research gold and into analyzing and investing in junior gold shares. Currently he also hosts his own one-hour weekly radio show Turning Hard Times Into Good Times,” which features high profile guests who discuss leading economic issues of our day. The show also discusses investment opportunities primarily in the precious metals mining sector. He has been a guest on CNBC, Fox, Bloomberg and BNN and many mining conferences.