There is no denying that inflation is becoming a bigger problem by the day. Just yesterday, the UK’s latest inflation print showed a 5.4% increase in prices on a year-on-year basis in December 2021. To put this in context, the Bank of England’s target rate is 2%. This means that inflation is 3.3 percentage points above than the central bank’s comfort level. This of course could have negative implications for my stock market investments, as price rises could dampen consumer spending. But where there are problems, there are solutions. Like this FTSE 250 penny stock, which could be a good hedge to inflation for my portfolio.
Centamin’s had a poor 2021
Gold miner Centamin (LSE: CEY) has had a difficult past year. It briefly climbed fast during the start of the pandemic in 2020, but has fallen a lot since. It pretty much fell throughout 2021, to reach penny stock levels in August. It has largely stayed at these levels.
It does not help that the company’s performance was also underwhelming. In the first half of 2021, the latest numbers available, both its revenues and post-tax profits declined despite an increase in the average realised gold price. More recently, its gold production update shows that while it is in line with expectations, it has declined from last year, as have revenues.
The penny stock could pick up now
I think now, however, the stock could pick up. In 2022, its production is expected to exceed that in the past year. Recently, gold prices have also started rising, which could bode well for its financials. Increasing gold prices is no coincidence, of course. Gold is a well-known traditional hedge against inflation. This is because rising prices erode the value of currency. And gold has historically been the alternative ‘safe-haven’ asset.
However, there is a deeper reason as well. Runaway inflation has the potential to destabilise economies. Inflation has already risen a lot, and if it continues to do so, I reckon investors could panic, which is even more likely to make gold attractive. This is exactly what we saw when Centamin’s share price ran up during the first half of 2020. And considering that inflation is indeed expected to rise higher – some forecasters expect it to be over 6% by spring – I think it might just be a good idea for me to buy this FTSE 250 stock now.
The FTSE 250 stock’s dividend yield looks good
I also like its dividend yield of 5.5%, which is much higher than that for the average FTSE 250 stock at 2%. For that matter, it looks better than the average FTSE 100 stock’s dividend yield of 3.4%. In fact, considering that its results could just be better this year, I think its dividends could stay elevated. As a long-term investor, I always like to hold some of my savings in gold-related instruments anyway. And there is nothing like it if they also earn me a solid passive income over time, which is also one of my investing goals. I intend to buy Centamin soon, while it is still a penny stock.