With the AI revolution in full swing, investors seem to have lost sight of what truly matters in an inflationary environment: physical goods.
At least, that’s the lesson of past investment manias—including the late 1990s Internet stock boom and mid-2000s housing bubble. In each case, the speculative period’s termination resulted in physical assets like gold, silver and essential resources experiencing renewed strength and vigor.
Charles Kindleberger established the widely accepted definition of a speculative “mania” in his classic book, Manias, Panics, and Crashes. According to him, a mania can be described as a period in which rising asset prices become self-reinforcing, attracting increasing numbers of buyers who purchase mainly because they expect prices to continue rising—not because of the asset’s underlying value.
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He also provided some helpful guidelines for identifying speculative manias that could arguably apply to the current AI boom. Among them:
1. A technological “displacement” created by the object of investors’ obsession, with the new technology serving as a massively “transformative event.”
2. A major expansion of money and credit, which, in the case of AI, is seen in the hundreds of billions of dollars in AI infrastructure spending.
3. Self-reinforcing buying, as rising AI-related stock prices attract ever more buying interest based, at least in part, on the “fear of missing out” (FOMO).
4. Valuation, which is in question as many AI companies trade at extremely high multiples.
To be fair, a counterargument can be advanced in which the ongoing AI boom is not a speculative mania since, unlike many of the companies of the dotcom era, the major AI players are producing significant revenue and free cash flow.
Actually, I’m not here to argue the AI boom has entered a classic “mania” phase. And I’m not saying investors should categorically dump their AI stocks or avoid exposure to the sector altogether. My point is that participants should avoid the mistake of being hyper-focused on the “intangible” tech sector (which may well be in the early stages of a bubble) and have some exposure to the “old economy” companies that produce tangible assets—particularly those that can benefit from inflation.
Some examples of hard asset-based, old-economy companies certainly include precious metals. These are the firms that mine inflation-resistant metals like gold, silver, platinum and palladium—with the last three of those metals, incidentally, also in high demand for various tech and industrial applications.
7 “Old Economy” Stocks That Benefit from Inflation
As for gold, it has recently overtaken U.S. Treasury bonds as a major component of official global reserve assets held by the world’s central banks, underscoring its growing monetary significance. With that in mind, having some exposure to physical gold, as well as to the stocks of major gold producers—such as Barrick (B) and Kinross Gold (KGC)—is probably a good idea.
Chemical makers also provide exposure not only to some essential aspects of the physical economy, but they can also help investors protect against inflation. Major specialty chemical producers often enjoy pricing power that allows them to circumvent the negative effects of higher energy and raw material costs, especially when demand is strong (as it is currently).
To that end, with the cycle for specialty chemicals showing signs of finally beginning to turn up, it should benefit the major companies in this sector—think Ashland (ASH), Chemours (CC), DuPont (DD) and RPM International (RPM).
Finally, agricultural companies and fertilizer producers are often overlooked beneficiaries of sustained inflation. Because they provide essential inputs and products tied to global food demand, many have pricing power that allows them to pass along higher costs, particularly during periods of tight supply, helping support profitability. (From a value perspective, Mosaic (MOS) looks particularly intriguing to me since it’s undergoing a strategic repositioning after a prolonged downturn in the fertilizer cycle.)
All told, with war-driven inflation not likely to abate anytime soon, I maintain that investors should put more emphasis on the “old school” aspects of the economy while avoiding getting too caught up in the AI hype of the high-tech realm. There are certainly more bargain opportunities to be found in the former than in the latter.
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