Soda, Silver, And Inflation: The New Cola Wars

Inflation is showing up in the government's official statistics, and the Fed, including Fed Chair Jerome Powell, is welcoming the increased inflation and assuming that this inflation is “transitory”. Of course, when the Federal government and the Fed talk about inflation, often times the message can be confusing or in the abstract. The topic of rising prices is perhaps more important now than ever, however, especially if we are entering a stagflationary or hyperinflationary environment, because inflation affects pretty much everybody, and it certainly affects all users of US dollars.

I’d like to write about one specific example of ongoing current, real-world inflation, which also explains how the sting of inflation is about to become even more painful than most people make it out to be, and what, if anything, can be done about the rising prices. In this example, a soft drink will be discussed, but the points can be projected onto other things as well, including silver.

Especially silver.

THE RETURN OF THE COLA WARS

Back in the 1980s, there were the “cola wars”. Which was better, Coke or Pepsi? Both companies spent big money on advertising, including the production of TV commercials on the caliber of Hollywood blockbuster movies and the use of mainstream, pop culture celebrities of all types to market the products. In the 2020s, however, the cola wars will be making an unfortunate return, only, it won’t be fought in friendly battles determining which soft drink is better, but rather, these new cola wars will decide the fate of many people when it comes to one’s “cost of living adjustment”, or COLA, also known as a pay raise. You see, it’s not so much about Coke versus Pepsi, but rather, Coke versus itself, and really, any and all people and businesses for themselves, doing whatever is necessary for individual survival rather than coming out on top the victor per se.

My family has been drinking Coca-Cola for decades. We always purchase Coke in 12-ounce aluminum cans in one of the larger size packages, which would be the 24 pack if purchased from Walmart or the 35 pack if purchased from Costco. In early 2020, Walmart introduced a home delivery service of groceries and the company revamped its website somewhat, including the ability to search receipts online from “Walmart Grocery”. In April of 2020, I was paying $7.88 at Walmart for a 24 pack of Coca-Cola. On my most recent purchase from Walmart, just last week, the regular, everyday price is now $8.28. Generally speaking, we can say the price rise in Coca-Cola over the last year is more than 5%. The price increases at Costco for the 35 pack of Coke are similar in size.

Although the price increases won’t stop there, because just this week, on Monday, the CEO of Coca-Cola said the company will be raising prices even more to offset rising commodity prices!

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From CNBC (bold added for emphasis and commentary):

The beverage company joins a number of other consumer giants, such as Kimberly-Clark and J.M. Smucker, in hiking prices. While the move will help their profit margins, it may come at the expense of cash-strapped consumers who are still struggling from the economic impact of the coronavirus pandemic.

We are well-hedged in ’21, but there’s pressure built up for ’22, and so there will have to be some price increases,” CEO James Quincey told CNBC’s Sara Eisen on “Squawk on the Street.”

We intend to manage those intelligently, thinking through the way we use package sizes and really optimize the price points for consumers,” he added.

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Wow!

There are so many things to unpack in just a few paragraphs of that mainstream financial press article. First of all, consider the context: The price of Coca-Cola, in an industry-wide standard size (12 oz can), has already gone up 5% over the last year, and now, the CEO of Coca-Cola is not just saying there may have to be but there “will have to be” price increases! Secondly, notice the concept of hedging – more on that later – in that Coca-Cola’s CEO is acknowledges upward price pressure for next year.

Now, if Jerome Powell says the inflation is “transitory”, yet the CEO of Coca-Cola is telling us the price pressures have already “built up” for 2022, after prices have already risen over the course of 2020, then exactly how many years of transition is Jerome Powell talking about? Furthermore, if prices rose 5% last year, and if prices rise, say, another 5% this year, with pressure building for next year, or the year after that, and so on and so forth, then how does a person even keep their head above water, so to say, when Coca-Cola is just one of the hundreds of items the modern-day American consumer buys on a regular basis? And it’s not just Coca-Cola raising prices but major brands covering many foods and household products, such as Kimberly-Clark, J.M. Smucker now even Procter & Gamble said they’re raising prices.

But wait, there’s more!

That’s right folks because it’s one thing for Coca-Cola to raise its prices on Coke, but it’s another thing to actually get a can of Coca-Cola in hand, so to say, not unlike the ability to get real, physical silver in hand. In other words, what happens if Costco or Walmart have to increase their employees’ wages for one reason or another? Or what happens if the logistics costs such as transportation and storage go up? Or what happens if there is some type of other unforeseen supply chain disruption, such as a sugar refinery fire that takes a major refiner offline, something that happened just yesterday in Baltimore?

All of these other dynamics affecting price may be thought of as the premium, not unlike the premium one pays for a silver bar, coin, or round. That is to say, generally speaking, the price for Coca-Cola is one thing, and the price for Coca-Cola is rising, but consumers don’t buy soda directly from Coca-Cola, much like investors do not buy raw silver directly from the miners. Instead, consumers buy Coke through the various wholesale and retail outlets, which most likely will be raising their prices above and beyond the price increase of the soda itself in order to keep up with the rising prices for the extras, such as higher employee wages or the increased costs of transportation. Simply put, Coca-Cola may be raising its prices, but retailers may have to raise their prices even more when considering the myriad dynamics involved in getting Coke from production to market.

COMBATING PRICE INFLATION: HEDGING AND INCOME

In so many ways, the example of Coca-Cola is a lot like the silver market. Silver’s price is dictated in the paper futures market (Coke’s price is dictated by Coca-Cola), yet the price one pays to get an actual ounce of silver, in-hand, depends on the extras, such as the cost to refine the metal.  the cost to sell the metal and the cost to ship the metal. Suffice it to say, the price of silver, or Coca-Cola, or whatever, is rising, but rising in so many different ways at seemingly every step of the way.

What is one to do, and how does one keep up, or, at the very least, not fall behind?

The answer is two-fold: by generating more income and by hedging.

I say the “New COLA Wars” because in my opinion we’ve clearly entered an inflationary environment, and workers' incomes will need to pick up in order to keep up. The population most at risk in this war are those people on a fixed income, such as pensioners, Social Security recipients, and disabled Veterans. If the Fed or the Federal government are not clearly capturing this inflation at best, or are purposefully understating this inflation at worst, then tiny, single-digit percentage cost of living adjustment increases, COLAs, are not going to keep up.

People not on a fixed income are also at risk, and the real challenge here is in not just adapting to changing dynamics in the markets and in the economy, but being able to generate higher levels of income as inflation runs rampant. All savers of US dollars lose in this war automatically lose because dollars saved under a mattress, saved in a savings account that pays a joke rate of interest or saved in some other platform that is not generating any yield, lose purchasing power every single day.

This is where the concept of “hedging” comes in. In its simplest terms, a “hedge” is made when a person makes a conscious decision to do something to protect against something. In this case, we’re talking about an “inflation hedge”, and the context is protecting oneself from rising prices. If the price of Coca-Cola is going up, one could simply stock up on pallets of Coke as a hedge. But Coca-Cola has a shelf life, and what if a person develops diabetes and can no longer drink the sugary soda? Getting stuck with pallets of 10-year old Coke is not a good inflation hedge.

Nor does 10-year old Coke taste very good, but I digress.

Silver, on the other hand, and in my opinion, is the best inflation hedge.

Unlike Coca-Cola, silver can be stored forever. Unlike Coca-Cola, every single person on the planet is naturally a potential user of silver. Unlike Coca-Cola, a bar of silver can be turned into many things, such as electrical components on a circuit board or a dental implant. Now sure, Coca-Cola is useful in barter, and anybody who has been in the military, or perhaps prison, knows this, but silver is much more useful in barter than Coca-Cola. And finally, if one believes there has been an active silver price suppression policy engaged upon by governments and central banks around the world, then silver has been artificially underpriced, and as such, there is a lot of catching-up for silver to do with regards to its current price. Silver is, after all, barely half over its all-time record high, which was set in 1980, and, according to the Fed’s own inflation calculator, using a price of $50 in 1980, we can see the inflation-adjusted all-time record high silver price is $155.20 (in 2019 dollars).

Question: What would the 1980 price be in 2021 dollars after the trillions and trillions of dollars of fiscal and monetary “stimulus”?

Follow-up question: How long will it take for silver to catch up to those levels?

THE BOTTOM LINE?

Rampant inflation is already obvious to anybody who does their own shopping, to anybody who does their own repairs, or to anybody who is not on some posh salary with cushy benefits. Moreover, this rampant inflation is only going to get worse, for years to come. Of course, when inflation really rears its ugly head onto the scene, even those people that have posh salaries with cushy benefits are going to get burned by rising prices, and, if not properly protected, financially obliterated too.

I like Coca-Cola, and personally, I hope the recyclable glass bottle makes a comeback, much like how Coke is bought and sold in other countries around the world, Mexico included.

You know how you exchange an empty propane tank for a full one, paying only for the cost of the propane and not the cost of the tank?

Yeah, kind of like that.

And now, let’s take a dive into the charts.

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Paul Eberhart
Paul Eberhart
Senior Market Analyst and Columnist

Paul Eberhart has been actively trading and writing about precious metals for more than a decade. A U.S. Army Iraq War Combat Veteran, he holds an AS in Information Systems and Security from Western Technical College and a BA in Spanish from The University of North Carolina at Chapel Hill.