Use Currencies, Commodities to Hedge Inflation

by: Tactical Investor

Whenever, therefore, people are deceived and form opinions wide of the truth, it is clear that the error has slid into their minds through the medium of certain resemblances to that truth. (Socrates, BC 469-399, Greek Philosopher of Athens)


Inflation is defined as an increase in the money supply and not as many economists falsely refer to it as an increase in the cost of goods. The price increase is a direct result of inflation, but it is not the definition but just a symptom of inflation.

If one looks at the above two charts, one immediately spots how dramatically the money supply has risen in the last 12 months.

In less than 12 months, the money supply has risen to a level that is double that of 2003. M1 is increasing at levels not seen for over 40 years; take a moment to digest this fact that, when the economy is broken, when savings are low, when companies are scaling back, we have drug addicts driving the printing press to the breaking point. 1+ 1 always equal two and pushing the printing press into over drive must equate to some form of very strong inflation and most likely hyperinflation.

History clearly indicates that when the money supply increases, inflationary forces increase and the more dramatic the increase the more profound the inflationary effects are. It goes without saying that the current rate of expansion is basically illustrating that hyperinflation is moving closer to a reality with the passage of each day.

Note that the current administration has many ambitious plans: improve funding for Medicare, improve social security, provide universal health coverage, improve the infra structure, increase troop levels in Afghanistan, the future money this administration will be forced to lend banks once the commercial mortgage sector starts to crumble, etc. All these programs need extra money, money this country does not have, and the only way to create this extra money is to print it as no nation is going to lend this country the trillions of dollars it will need to fund all these ventures.

It, therefore, goes without saying that, unless this administration dramatically cuts down on spending or increases taxes by a back breaking amount, inflation and then hyperinflation are going to hit this economy soon.

Now in the not so distant past, the world at large was busy proclaiming that the US economy no longer had as much as an impact on the rest of the world’s economies as it once used to. Well, that myth has come to an end; when the US housing market tanked and the credit markets froze, the rest of world crumbled also.

Thus the old saying still applies, when the US sneezes the rest of the world catches a flu and in some cases bronchitis or pneumonia. Thus whatever happens here will have a global effect and other nations are not going to be able to come out and say that it’s different this time, for the reality is that it's not.

For a long time, individuals in the euro zone assumed that they were better off, the reality is that the situation is a lot more troubling in the euro zone than it is in the US. Several of the countries that make up this zone are in deep trouble so the long term prospects for this zone are not very bright at least not for the next few years.

The question now comes down to which location is less ugly, for most nations are in deep trouble. It is for this reason that we are strongly advocating commodities based investments for, regardless of the currency they trade in, we expect them to trade significantly higher in the years to come.

If we had to choose between the euro and the dollar, we would not, but instead would deploy our money into the following currencies: the Canadian dollar, the Hong Kong dollar, the Chinese yuan (probably the main one) and maybe the Australian dollar. Those looking to invest in currencies should spread their money in at least 2-3 of the above currencies.

Note that we are strictly speaking in terms of investing in currencies directly or via currency ETFs and not the futures market. Believe it or not, inflation and hyperinflation provide incredible opportunities to make even more money in the stock and futures markets provided one holds the right investments and usually a good advisory service is required to help with timing of such transactions. Assets always over inflate to compensate for inflationary pressures, so if the dollar were to lose say 20%, certain based commodities assets could increase in value anywhere from 60%-100% if not higher.

As we have stated before, the next 6-9 years are going to produce profound changes. These changes will be so extreme and deep that it will literally stun the unprepared, for the majority have not and will most likely never again be exposed to such dramatic forces again in their life times. Hyperinflation means that you go out today to buy a loaf for 3 dollars and when you come back tomorrow the cost has risen to 4 or 5 dollars. We had a brief taste of this last year when petrol prices kept increasing on a weekly basis.

We would therefore, once again strongly advise all our subscribers to eliminate all debt, live 1-2 standards below your means and use a large percentage of this money saved to purchase bullion and commodities based stocks; buy during strong pull backs and or corrections. The time to prepare is when the sun is shining, for once it starts to rain it’s usually too late.

Not all the currencies we mentioned have ETFs and so one could invest directly in them by opening a bank account (an offshore account that allows you to invest in a basket of currencies). When possible, we recommend choosing from the following ETFs:

  • Canadian Dollar = FXC
  • Australian dollar= FXA
  • A wild speculative play would be the Russian Ruble = XRU.

Other means to hedge oneself against the side effects of inflation is to deploy money into commodities. The following commodity based ETFs would and should perform well in an inflationary and hyper inflationary environment.

Disclosure: We have positions in SLV, USO and UNG