Inflation Hedging: How to Protect Your Portfolio 27 comments
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Right now, the markets are caring about one thing: inflation. And they’re starting to get a little edgy. They need inflation hedging…
Why? The U.S. Treasury is printing money and dumping it into the financial system at historically unprecedented rates, in an effort to stimulate the economy.
Chances are good that the Fed won’t know when to stop the printing presses. Continuing to print money only exacerbates the inflation problem and deepens the hole.
And it’s quite a hole.
Jessica Hoversen, Fixed Income Analyst at MF Global, had this to say Thursday on CNBC: “The ratio of U.S. budget deficit to [gross domestic product] GDP is at the highest level since World War II.”
The government thought process goes something like, “If some stimulation is good, more will be even better.” And most politicians, who are always looking ahead to the next election, won’t want to risk their futures by cutting off ANY economic aid prematurely.
It goes on and on…
The real problem though, is that all of this economic over-stimulation sets us up for inflation. It’s something every investor should guard against in his or her portfolio. And it’s why we’ve got the best four investments for you to hedge against inflation’s impact.
The Tried and True Inflation Hedge - Gold
These days, many think of gold as a great investment for its safety and growth. And solely based on the amount of direct-mail advertisements I get from gold bugs, you’d think it was the only investment worth keeping.
But in fact, it really is an effective inflation hedge against a declining U.S. Dollar and an inflationary economy. It’s why every investor should have some exposure to gold in his or her portfolio. As part of our Asset Allocation Model, we recommend 5%.
For all its benefits, there are currently two problems with the physical metal: It’s in great demand - and therefore hard to get - and purchasing it requires a stiff premium - in some cases, 10% or more - when and if you do find bullion or coins to invest in.
A much better way is to pick up a few shares of SPDR Gold Trust ETF (NYSE:GLD), which seeks to replicate the price performance of gold bullion. Shares of GLD trade at the ratio of 10 shares to one ounce of gold.
This investment trust holds the physical metal for investors in vaults: You can see what those gold vaults looks like.
HSBC Bank (HBC) serves as the custodian of the trust’s physical gold, and recently had to move it to a larger vault to accommodate growing investment.
A Stand-Alone Inflation Hedge - Inflation-Adjusted Treasuries
Our next inflation hedge is inflation-adjusted Treasuries (TIPS). These investment bonds stand alone in the investment world, as they’re the only investment guaranteed to beat inflation.
Essentially, they are Treasury bonds that hedge against inflation - the bondholder gets an interest payment twice a year, just like a standard Treasury note.
But the catch here - and it’s a good one - is that the bond principal increases each year by the amount of the consumer price index (CPI). And so does the amount paid in interest, which is exempt from state and local (but not federal) taxes.
While the bonds themselves can be purchased directly from the U.S. Government or any broker, the easiest way to participate in them is through the iShares Barclays TIPS Bond Fund (AMEX:TIP).
This fund seeks to duplicate the return of the Barclays Capital U.S. Treasury Inflation Protected (TIP) Securities Index.
And while regular Treasuries have lost 3.9% (including interest payments) this year, TIPS have returned 3.6%. That’s a full 7.6% better return than Treasuries with the same amount of safety.
Hedging Against Inflation With Energy Stocks
Our third hedge against inflation is energy stocks because energy figures into the cost of just about everything. And since oil and natural gas are priced in dollars, an inflationary cycle tends to raise the price of energy and energy-related stocks.
Of course, even without inflation, the long-term trend for energy prices is one way: up. Inflation will just add fuel to an already burning fire (pun intended).
Rather than looking at individual energy stocks, however, consider a shotgun approach in the form of an energy exchange traded fund or ETF.
One we like for its low fees and solid performance is the Vanguard Energy ETF (NYSE:VDE), which seeks to replicate the performance of the Morgan Stanley U.S. Investable Market Energy Index. It’s up over 29% since its March low.
Made up of a diverse group of large, medium and small cap companies in the energy sector it provides wide ranging coverage of the sector. In addition, it includes companies such as drillers, equipment providers, exploration, refining marketing and production and transport of oil and gas products.
As I find energy and infrastructure some of the most interesting opportunities in the markets today, investing in energy companies allows us to easily align our hottest investing ideas alongside inflation protection.
A Final Inflation-Protection Hedge - Commodities
Our final inflation-protection hedge is in commodities like wheat, cattle, fertilizer, and base metals - all usually rise during inflationary periods.
Until recently, profiting from commodities involved commodities futures trading, something that most people know little about.
But now investors can leave the fancy and complex futures trading to the experts, and reap the benefits as commodities rise.
The Pimco Commodity RealReturn Strategy Fund [MUTF: PCRDX] invests in both leveraged and unleveraged commodity-linked index notes to match the return of the commodity futures markets.
The fund also uses other fix-income instruments like treasuries and preferred stocks to increase returns and lower the volatility that is commonly associated with investments in commodities.
Well, there you have it: four great ways to protect your portfolio against the coming inflation wave. In the coming weeks and months we’ll bring you additional ideas in these areas.
Regardless of how you do it, in the current environment, investors need to keep their eyes focused on inflation. And as the global economic engine shifts into higher gears it will likely become an even more significant factor.
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This article has 27 comments:
except for some aspects of the CPI thus making TIPS a not such a great hedge. Historically, this level of money printing is unheard of....I would stick with the gold.
Want Gold & Silver a COMPETITIVE prices? Go to a COIN SHOW where there will be many dealers in the same room competing for your business. Baltimore Convention Center June 12-14 (FREE ADMISSION) will have at least 300 DEALERS selling coins & currency, with 50 OR MORE selling bullion related Gold & Silver at very competitive pricing. There you will be able to buy 90% silver coins AT OR BELOW SILVER SPOT, and GOLD coins from SOUTH AFRICA, MEXICO, USA, CANADA, ENGLAND, etc., at prices between 2% to 10% over spot (melt) prices and receive PHYSICAL DELIVERY, not a piece of FIAT paper assuring??? you there is gold or silver stored??? in vaults??? for you.
Can't get to Baltimore? The following site is a listing of coin shows you can go to... some most likely in your area.
www.numismaster.com/ta...;@mc=1&ThisWeek=1
What we are seeing now is an increase in the rate of inflation to levels not seen in several decades. What will work for individuals is the same standards for investment that have work for me for the past thirty years.
Summarized the rules are simple, and in no particular order.
!. Own assets that have a value separate from the dollar. Examples are: Farm land, Gold, silver, oil, copper, uranium, and other real property.
2. Don't overpay. If you buy a building, be sure that you purchase it at a price at or below the cost to put up a similar building in the same area. Be sure that the building, if rented out would have a positive cash flow.
If you buy a gold mine (shares) be sure that the price you pay is less than the cost to build a similar mine, and that the gold in the mind is fairly valued. Be sure the company is comfortable cash-flow positive.
3. Borrow as much FIXED RATE debt as you can support during the worst likely future. As the value of the dollar goes down, so does the value of the debt you owe, leaving you with greater net value (equity)
4. Do not assume that government pensions will hold value. The impulse to change the method of inflation adjustment by government will be irresistible. Don't be surprised if the government eliminates things like food, housing, fuel, energy, and medical costs from the Consumer price index as "too volatile" ie: their prices are going up higher than the government wants to admit. That will result in your Social Security, Military Pension, and State pensions going down in real purchasing power.
5. Strongly consider transferring assets or moving to countries whose cost of living (measured in dollars) is much lower than the United States, and whose economies are dependent on a large variety commodity based products.
6. Do not buy bonds, except as a short-term investment, unless the bonds are fully inflation protected.
7. I am not a "Gold Bug" - so this last suggestion is at the far-end of the un-likely. Consider that the US government may again make the owning of Gold coins and similar portable sources of wealth illegal. While this is of low probability, consider this as the endpoint before a re-issuing of the currency. It would provide the US government a way to collect additional reserves by forcing people to accept soon to be worthless paper for Krugerands, silver dollars, gold ingots, platinum bars, etc. Placing assets overseas will reduce this risk, and may be one element of your program af asset re-deployment.
NOTE: If the situation really gets bad, the government could resort to a tactic used by other countries, such as Japan. People with incomes based on production from companies or with pensions guaranteed by the government could be forced to accept "equal value" of government treasuries, providing equivalent income. In the event of dollar re-valuation, these incomes would essentially disappear, impoverishing those groups that had accepted the Treasuries.
The Chinese are very aware of this possibility. As a result they are trading long term Treasuries for shorter term Treasuries, and then trading Treasuries with other governments for real assets (commodities, commodity production contracts, land, etc.)
bit.ly/dxBFr
Comex and all those funds will default eventually !!
if you planing to invest in PM, get the real thing and hold it : cold, hard , core Gold & Silver !!
Gold & Silver bugs are a unique group of people. They are obsessed by holding the physical asset, and will pay any premium to do so.
On May 31 10:50 AM Baboon wrote:
> REITs are good inflation hedge since the rents go higher with the
> rising inflation.
So do taxes, interest expense and vacancies. Ever manage a real estate investment and their tenants? A major headache.
SILVER is the "working man's" GOLD.
Stock up before it breaks $20. Dubai is setting up a SILVER ETF projected to open in late June. If indeed they back it 100% with PHYSICALS, the price will react upwards as they take more off the physicals market, which is very very THIN at this point.
GOLD & SILVER are the "insurance" for THE DOLLAR !
Thanks in advance for any responses.
Charlie
First off, which is it, Treasury or the Fed?
But more importantly, are you aware that currency in circulation, that is currency outside of the Fed and Treasury, has increased less than 10% since August? Perhaps this rate (about 15% annualized) is unprecedented. But if it is to be feared, can you explain why?
Jan 7 FUN Show Orlando 25-35% over melt ($11.25/oz spot price)
April 30, Cinti, Central States Conv. face 90% silver coins were selling for 10-15% over melt. ($12.50/oz spot price)
May 22 at the Pittsburgh Coin Show the trading range was 2% below melt to 1% over melt. ($14.60/oz spot price)
May 29 at Long Beach Coin Expo 3% below melt to melt . ($15.75/oz spot price)
Prices were for CASH payments. Check payment were slightly higher. No credit cards at these levels.
As you can see, as the price of silver escalated, the % droped. Larger quantities 1/2 to 1% less. Smaller quantities 1-3% higher.
Once the price has settled down and silver trades in a price range ...say $17.00... for 30-45 days, spreads will INCREASE as demand will go up as selling into the market will slows down creating more demand than supply.
Let's suppose silver climbs to $25./oz by December. Demand will will be greater than supplies and the spreads will increase to 10-15% maybe higher.
Prices for 1, 5, 10 &100oz bars/ingots are slightly higher than coin silver at this time.
NOW is the cheapest you will see spreads for the next few years!
K Rands are now selling for $30. over melt...$25. over in quantity.
On May 31 03:16 PM Prudent Man CFA wrote:
>
Curious- do you get soaked for state sales tax at these shows? Paying a 6% "commission" here in PA is obscene. Also- anyone know of dealers in the great state of Delaware?
On Jun 01 02:12 PM gold33vain wrote:
> Market trends CHANGE. Using $500. face (375.5 oz pure) as a base:
>
>
> Jan 7 FUN Show Orlando 25-35% over melt ($11.25/oz spot price)<br/>
>
> April 30, Cinti, Central States Conv. face 90% silver coins were
> selling for 10-15% over melt. ($12.50/oz spot price)
>
> May 22 at the Pittsburgh Coin Show the trading range was 2% below
> melt to 1% over melt. ($14.60/oz spot price)
>
> May 29 at Long Beach Coin Expo 3% below melt to melt . ($15.75/oz
> spot price)
>
> Prices were for CASH payments. Check payment were slightly higher.
> No credit cards at these levels.
>
> As you can see, as the price of silver escalated, the % droped.
> Larger quantities 1/2 to 1% less. Smaller quantities 1-3% higher.
>
>
> Once the price has settled down and silver trades in a price range
> ...say $17.00... for 30-45 days, spreads will INCREASE as demand
> will go up as selling into the market will slows down creating more
> demand than supply.
>
> Let's suppose silver climbs to $25./oz by December. Demand will
> will be greater than supplies and the spreads will increase to 10-15%
> maybe higher.
>
> Prices for 1, 5, 10 &100oz bars/ingots are slightly higher than
> coin silver at this time.
>
> NOW is the cheapest you will see spreads for the next few years!
TX and other states have no sales tax on purchases over $1000.
Before going to a coin show, phone a dealer in that state to find out about sales tax laws.
Ask for RAY
On Jun 02 11:47 AM gold33vain wrote:
> First State Coin Dover 302-734-7776
>
> Ask for RAY
Agcapita (focusing on Canada)
Agrifirma (focusing on Brazil)