A Better Way To Profit From Inflation Than Gold Or Silver

Jan. 6.13 | About: ProShares 30 (RINF)

The Fed has announced QEternity, and will be pumping about a Trillion in new money this year. Annual budget deficits are in excess of a Trillion as well. The national debt stands in excess of $16 Trillion.

Where is inflation?

Waiting for inflation has become somewhat like Waiting For Godot these days. Core CPI is 2.2% per the November report and 2.0% excluding more volatile food and energy prices. Consequently, the year has not treated precious metal investors well. The SPDR Gold Trust ETF (NYSEARCA:GLD) and the iShares Silver Trust ETF (NYSEARCA:SLV) are both essentially flat for the rolling 12 months period, just as you would have expected going by inflation. Meanwhile, the SPDR S&P 500 Trust ETF (NYSEARCA:SPY) is up about 15.5%.

RINF Total Return Price Chart

Are there other alternatives to gold and silver to profit from inflation (if and when it shows up)? I think so. The ProShares 30 Year TIPS/TSY Spread ETF (NYSEARCA:RINF) has done quite a bit better.

So what is the RINF? According to Seeking Alpha

ProShares 30 Year TIPS/TSY Spread seeks investment results, before fees and expenses, that track the performance of the Dow Jones Credit Suisse 30-Year Inflation Breakeven Index.

Curious and curiouser! What is this Inflation Breakeven Index?

The Dow Jones Credit Suisse 30-Year Inflation Breakeven Index measures changes in the long-term inflation expectations implied by the U.S. government bond market. The index essentially tracks the difference in returns of OTR 30-year TIPS bonds and the closest maturity Treasury to the OTR TIPS.

So what are TIPS?

As I wrote in a previous article, the definitive market indicator of forward looking inflation expectations is the TIPS spread. TIPS are inflation protected treasury securities. The principal is adjusted by the Consumer Price Index. The coupon rate is constant but produces different yields at varying rates of inflation as the principal changes, thus protecting the holder against inflation. Hence, the TIPS yield indicates the real return for the investor over the investment horizon, while the corresponding treasuries indicate the nominal rate.

The gap between the two is the inflation compensation as demanded by the market over the duration of the bond. The 30 year TIPS spread is around 2.5%. The further you go out on the yield curve, the more is the TIPS spread. This is because of uncertainty in the future, which is why investors demand higher inflation protection.

So, while near term backward looking inflation has been tame, forward looking inflation is slightly higher, the more you go out on the yield curve it gets even higher, and that forward looking spread has been widening (which then pushes up the RINF). It may be a while till inflation actually shows up in current terms, but the future expectations of inflation will get reflected in the yields spread much, much earlier. Hence, investors trying to profit from inflation will do better by investing in something like the RINF than they will by investing in precious metals.

Disclaimer: This is not meant as investment advice. I do not have a crystal ball. I only have opinions, free at that. Before investing in any of the above-mentioned securities, investors should do their own research, consult their financial advisors, and make their own choice. I am merely stating what I personally plan to do for my own portfolio.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.