The Fed is raising interest rates aggressively in an attempt to tame raging inflation.
But according to legendary investor Rick Rule, former president and CEO of investment fund Sprott U.S. Holdings, things may not go as planned for America’s central bank.
“I think they’ll chicken out,” he told Stansberry Research earlier this month.
“If we had a period of real interest rates it would certainly cure inflation, but it wouldn't cure inflation until it did amazing damage to various balance sheets.”
This isn't the first time Rule has voiced concern about the economy’s ability to handle substantially higher interest rates.
In an interview with MoneyWise earlier this year, he said, “I do not believe that the broad equities market will handle multiple rate hikes.”
Rule doesn’t suggest bailing on stocks completely. Here’s a look at three things the super investor still sees opportunities in.
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Consumer prices are rising at their fastest pace in 40 years. While the Fed is tightening, Rule doesn’t believe the rate of inflation will slow anytime soon.
“I think we'll continue to see prices going up for most of the remainder of the decade,” he told MoneyWise.
To preserve your purchasing power, Rule points to gold and silver, which can’t be printed out of thin air like fiat money.
“I think that an investor who does not have some of his or her wealth in precious metals or precious metals equities are making an extraordinary mistake,” he cautions.
You can buy physical gold and silver at your local bullion shop. Or you can buy shares in companies that produce precious metals.
For investors who are getting started in the sector, Rule suggests looking at the big names first such as Barrick Gold (GOLD) and Wheaton Precious Metals (WPM).
“The first part of a gold bull market and the most predictable part of a gold bull market is enjoyed by the biggest and best companies in the space.”
He adds that when money from retail investors moves into the precious metals market, it doesn’t go to the small speculative names. “It goes into Barrick.”
When building an inflation-proof portfolio, Rule also likes Warren Buffett’s idea of investing in price-makers: businesses that can easily increase the price of their products and services without jeopardizing demand.
“Buffett has been pointing out going all the way back to the 1970s that there are businesses that are so superb that they have pricing power,” Rule says.
He uses Apple as an example.
Early last year, Apple’s management revealed that the company’s active installed base of hardware had surpassed 1.65 billion devices, including over 1 billion iPhones.
While competitors offer cheaper devices, many consumers don’t want to live outside the Apple ecosystem. That means as inflation spikes, Apple can pass higher costs to its global consumer base without worrying too much about a drop in sales volume.
But Rule doesn’t advocate buying Apple.
Instead, he suggests a representative sample of what he calls “global dominators” through the exchange-traded fund ProShares S&P 500 Dividend Aristocrats ETF (NOBL). NOBL holds S&P 500 companies that have paid increasing dividends for at least 25 consecutive years.
“[The fund] has shown itself over the very long term to be a very efficacious strategy for more than maintaining purchasing power, for adding to your wealth,” Rule says.
Since NOBL’s inception in October 2013, it has delivered annualized returns of over 12%.
At a time when high inflation is rapidly eroding purchasing power, it might not make sense to keep a bunch of cash on hand.
But that’s exactly what Rule recommends.
Sure, savings accounts pay next to nothing these days. However, Rule says that cash gives you the ability to take advantage of moments of illiquidity.
“I learned a lesson some years ago in 2008. When I ran into that crisis well-cashed up, the cash gave me both the courage and the tools to take advantage of that circumstance rather than being taken advantage of.”
With the global financial markets likely to remain volatile over the near- to medium-term, investors flush with cash won’t have a shortage of buying opportunities to capitalize on.
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This article provides information only and should not be construed as advice. It is provided without warranty of any kind.