In my investing lifetime there has been one great inflation cycle. It began with an inflation rate of about 1% in the early 1960s rising to 5.5% by 1969 and accelerating through the 1970s to a peak of 14.75% in April 1980. Paul Volcker, the 6’6” cigar-smoking Federal Reserve chairman, came to the rescue. He squeezed the money supply and raised interest rates: the prime lending rate, which banks charge their most credit-worthy investors, reached 21.5% in December of 1980. This triggered two recessions in quick succession, which stemmed the rising tide and reversed the direction of inflation. From 1982 to 2020, inflation declined irregularly to about 1% where it had begun in the early 1960s. However, the conditions that produced disinflation - cheap Chinese labor, sales of commodities by cash-needy countries and globalization - are no longer with us. The Fed seems inclined to print money to facilitate funding of the Federal deficits and seems less likely to have the fortitude to apply the Volcker shock to stem inflation should it start to accelerate. What is an investor to do?

Companies making products that are in demand will be able to pass on inflation through their own price increases in the long run. However, stocks are not cheap now and if interest rates rise in response to inflation, stocks will be under pressure. Bonds rarely compensate for rising inflation: when I entered the investment field in the early 1980s bonds had become known as “certificates of confiscation.”

For 2000 years gold has served as an inflation hedge and as a safe haven when investors get nervous about the state of the world. We believe Bitcoin now has the potential to join gold to serve these functions. In our firm we have added both gold and Bitcoin to client portfolios as well as other income-producing securities tied to royalties from commodities that we expect to be part of the rising tide of prices.

The following article written by our then Chairman, John Train, offers a view of the eternal attraction of gold as a store of value. Some things have changed since he wrote it: the total gold hoard then worth about $3 trillion is now worth $20 trillion and now Bitcoin, worth about $2 billion in total, offers similar characteristics to gold.