Use Currencies, Commodities to Hedge Inflation

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)

Source: ShadowStats.com

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.

• Oil= USO
• Gold = GDX
• Silver = SLV
• Natural gas = UNG
• Gold miners = GDX

Disclosure: We have positions in SLV, USO and UNG

Comments

[Roger Knights:]

"We would therefore, once again strongly advise all our subscribers to eliminate all debt, ..."

But don't debtors benefit from inflation?

Jun 28 07:29 AM

[bloex:]

I assume you meant GLD for Gold?

Jun 28 10:27 AM

[stocknerd:]

Once again you are crying wolf (inflation) when there is NO, NADA absolutely none ANYWHERE. All that money is being poured into a black hole call recession/depression and until that hole is filled will inflation com. Nowhere, please point out the iceberg, is inflation happening. It is like people shouting fears of sunburn on the life rafts while the Titanic (Economy) sinks. And the above post was correct debtors benefit from inflation paying off old oans with cheap bucks.
Trust me, uncle Ben with crank up the rates when the time comes.
There is no inflation in the near future. Or the near term future. Maybe a year from now. All the money supply charts are meaningless and only cry wolf. First crisis first, please.

Jun 28 11:48 AM

[ilc:]

USO is deeply flawed. Try old-fashioned energy stocks, or if you emotionally need to think you're holding the commodity, then try DBO or USL, which counteract *some* of USO's flaws. Never buy GLD; always hold physical gold.

Jun 28 12:03 PM

[American in...:]

Well, you're wrong. Inflation is defined as an increase in the price, and no, it is not the same thing as a rise in the money supply (assuming you can find the 'right' definition of the money supply).

In fact, Japan experienced dramatic money supply for an entire decade and it did not result in inflation. Deflation continued over a decade ....

Monetarism as you preach it is more religion than science. If you want take the religion out of your analysis, study the velocity of money.

The velocity of money is the key to understanding why money supply growth is consistant with stable prices or deflation.

Jun 28 01:04 PM

[Prudent Man...:]

The NBER, Fed, Labor and Commerce may not be showing inflation but my grocery bill does. Do these people shop?

Housing prices have decreased but rents have not proportionately.

I have an inherent distrust of statistics provided by people employed at the wishes of politicians. Having attempted to do a correlation analysis based upon government data I found revisions made so frequently, some as much as five years after the fact, that the project was impossible to complete as who could determine when everything was revised.

Jun 28 02:13 PM

[Alpha&Omega:]

Nice article. Are you suggesting we take a gradual position / accumulation of shares of FCA, FXA, etc over time? How much of our portfolio would you suggest spread among the various investments to give adequate protection? As a commodity rich country would you also consider Brazilian currency or just Canada, Australia and China? Are you suggesting a buy and hold approach here. In other words, I am going to buy some FCA over time and just hold onto these shares indefinitely or do you have only a short-term time horizon in mind?

Jun 28 05:41 PM

[Sol Palha:]

I am not sure what dictationary or what reference book the individuals who claim inflation is defined as increase in prices are using but the defintion is was and will always be an increase in the supply of money.

next issue. One can take on debt when and if one has money flowing in but if you are in a situation when jobs are hard to come by, salaries are not increasing and credit markets are frozen then just how do you plan on paying of your debt even if you are going to use inflated future dollars; note you continue to pay interest on this borrowed money and eventually rates will rise and they will rise at a very fast pace.

Finally one is advised to cut down debt but use this money to deploy into commodity based assets and not put this money under the mattress or in the bank.

In terms of USO and the other ETF's that were mentioned; there are far superior investments to these ETF's and this fact was mentioned in the article but when one gets into specific stocks and or futures contracts the time frame is different and one needs to monitor these investments rather closely as oppossed to ETF's where a more relaxed approach can be taken. As we are dealing with the public the easiest method is to list ETF's, sophisticated traders can purchase stocks that emulate the suggested ETF's.

As for the currency ETF's it would generally be wise to add to one' position till the commodity bull coms to an end. One can use simply trend analysis. Trend analysis should be done on 6 and 9 year charts so as to avoid all the noise that the shorter term charts produce

Jun 28 08:11 PM

[CLH:]

American in---is right. There is no inflation --in fact we are close to deflation. Commodities topped last summer and are headed down. Short them. Gold has done nothing for a year now (it was 1000 in March 2008).

Buy equities --they are up 50% since early March 2009.

Jun 28 08:17 PM

[Bob Mayo:]

If you want to argue definitions, I would suggest consulting Merriam-Webster:

"Inflation: a continuing rise in the general price level usually attributed to an increase in the volume of money and credit relative to available goods and services"

Jun 28 10:43 PM

[TheNextKenJ...:]

Yet another article by someone who takes a true statement (in this case: printing more money leads to inflation) to the extreme.

"In less than 12 months, the money supply has risen to a level that is double that of 2003". There can be no doubt that that has caused inflation, but the question here is to what extent. If you combine that with the statement "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", we should have seen a 50% loss in dollar value (because of the doubling of the money supply), and commodities at 150%-250% if not higher since 2003. Clearly, that is not the case. Therefore, the whole hyperinflation theory is out of the window. Inflation is happening, hyperinflation no way.

That does not mean that investing in commodities at this juncture is a bad idea. Long term commodities will get scarcer due to increasing worldwide demand. To protect themselves against that trend, every investor should have significant exposure to commodities.

I am not so sure about other currencies. Russia is unstable, so I would not invest in the Ruble. China keeps its currency artificially low. They have to, because otherwise their exports (which drive their economy) grind to a halt. The euro zone is not good either, because their business climate is no good. Canada and Australia will do well because those countries are rich in natural resources (and for no other reason), so their currencies are strongly correlated to commodity prices.

Keep on scaremongering the public at large, and maybe your predictions become true!

Disclosure: long calls USO and UNG at the time of writing

Jun 29 10:13 AM

[ren:]

Can someone knowlegable help? The article cites M1 statistics from shadowstats to show the explosion of money supply in the past 12 months. It is my understanding that the Federal Reserve "prints" money primarily through their open market activity involving Treasury debt, repos and reverse-repos and that these instruments aren't included in M1. They were included in M3 (now only privately estimated) but the chart offered shows M3 falling the past 12 months. Can anyone sort this out for me? Muchas Gracias.

Jun 29 11:31 AM

[User 235997:]

The author completely ignores simple economic concepts such as the velocity of money in his analysis. Just because we are printing more money does not necessarily mean we have more inflation. It CAN lead to higher inflation...it doesn't have to though. As cited earlier Japan is a perfect example of this happening.

Jun 29 04:01 PM

[Dr. O:]

>>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.<<

Sounds good. As I become more paranoid about the fragility of the financial system and our government I am leaning more toward actually holding bullion, myself, and would like to find a way to hold foreign currency directly as well.

Jun 29 08:40 PM