Investing Outside Gold To Hedge Inflation And To Secure Income

by: Bret Jensen

It has been an amazingly ugly couple of days for gold bugs as the price of the yellow metal is collapsing and is now firmly in its first true bear market in over a decade. Silver, the "poor man's gold," is faring even worse. Although I have several small positions in gold and silver miners and some minor way-out-of-the-money calls on the SPDR Gold Trust ETF (NYSEARCA:GLD), I have never invested directly in the metal itself.

Holding gold directly or through an ETF has several distinct disadvantages. There are storage costs if you hold the metal directly, and the metal throws off no cash flow. The gold ETF has grown so large (briefly surpassing the assets in the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) last year) that it is creating a problem in its own right. Since the ETF has to balance at the end of each trading day, it has to liquidate holdings as investors sell their GLD positions and creating selling pressure in its own right. It can truly be a vicious circle, especially in the quick downdrafts we have experienced in precious metals over the past few days. Finally, the price of the metal has had a huge run over the past decade and was overdue for a substantial correction.

One of the main reasons investors buy gold is as an inflation hedge to protect themselves from the likely long-term ramifications of actions by our Federal Reserve, the Japanese Central Bank, and other money printing central bankers around the world. I agree with the gold bugs out there that the logical consequence of these central bank policies will eventually lead to inflation or, even more likely, stagflation as job/economic growth will remain tepid while inflation could increase substantially. I would argue that this additional liquidity has already shown up in asset inflation and has been a primary driver of the recovery in our stock market and real estate prices since the end of the financial crisis. This is a "good" type of inflation if you own these asset classes. The "bad" type of inflation can be found in gas prices that have more than doubled off their lows in 2009, persistent rent increases over the last few years, and rises in some food categories (ex., meat and dairy).

I expect this divergence in inflation to continue in the near term. Therefore, I think a better way to benefit from the "good" type of inflation and mitigate the "bad" type of inflation is to invest in businesses that will see rising asset prices, while throwing off substantial cash flow that can be used to reward investors via distribution and/or dividend payouts. This means investing in real estate investment trusts (REITs) and energy infrastructure MLPs (master limited partnerships). An investor can invest in real assets that should increase in value over time, as well as capture a significant and growing income stream. Some of my favorite plays in these sectors for income investors are below.

Chatham Lodging Trust (NYSE:CLDT): I have owned and been writing about this unique lodging REIT since February of last year when it was trading under $13 a share. It is now at $18 and still offers a reasonable valuation and solid yield. Chatham owns 18 hotels with an aggregate of 2,414 rooms/suites in 10 states, and the District of Columbia and holds a minority investment in a joint venture that owns 64 hotels with 8,329 rooms/suites. CLDT should grow revenue in the low double digits this year and sells for 10x 2014's projected earnings. The stock also yields 4.6% and pays dividends monthly. It has increased its payout some 20% since it came public three years ago. I add to my position every time it drops to yield 5%.

Kite Realty Group Trust (NYSE:KRG): Kite develops, owns and manages retail properties including shopping malls and parking facilities. I first tagged this investment about a year ago when it was selling at under $5 a share. It now is priced a little north of $6.50 a share. Results are being driven in part by a large new and successful property complex in Delray Beach, Fla. Revenue is expected to increase at around a 14% CAGR over the next two years. KRG sells for just over 13x 2014's projected earnings and yields 3.6%. The dividend payout has been stuck for a few years as the company worked its way through the financial crisis. With the revenue and cash flow increases KRG should book in the next two years, I expect payouts to start to rise again in the near term. I add to my core position any time the yield hits 4%.

Martin Midstream Partners (NASDAQ:MMLP): The company's collection of facilities transports, stores, and markets petroleum products and by-products in the United States Gulf Coast region. The company owns or operates 27 marine shore based terminal facilities and 12 specialty terminal facilities among other assets. I highlighted the shares in November when they were selling near $31 a share. Now over $38 a share, the valuation is still relatively attractive. The company should increase revenues at just under an 8% CAGR over the next two years. MMLP yields near 8% (7.9%) and the company has more than doubled payouts in the decade that it has been public. I would add to my position if it pulled back to $35 a share (only because I already have a huge allocation to energy LPs and MLP).

Calumet Specialty Products Partners (NASDAQ:CLMT): I have owned this collection of specialty refinery assets since last March when they were trading at $24.50 a unit. Now over $35 a share, CLMT yields over 7% (7.1%) and is trading at just over 10x trailing earnings. The company just broke ground for a new diesel refinery with a partner that will supply product to the drillers in the Bakken. The shares have declined recently along with the rest of the refinery sector on compressing crack spreads and new federal mandates. I lightened up north of $40 a share and will add to my position if CLMT gets under $35.

Disclosure: I am long CLDT, CLMT, KRG, MMLP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.