Must-know: Inflation fighting investments


Nov. 25 2019, Updated 11:51 p.m. ET

Wondering how the various inflation fighting investments stack up? Russ answers reader and client questions about different inflation hedging strategies in his latest “Ask Russ” installment.

Though US inflation likely won’t be a problem until 2014 and beyond, it’s not too early for investors to start implementing long-term inflation hedges. But with so many possible inflation fighting investments out there, I continue to get lots of questions from clients and readers alike about the various protection strategies.

Q: Is gold no longer an inflation hedge?

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A: Gold certainly can be an inflation hedge, and it has worked in the past. Obviously, one of the reasons gold has been weak of late is that people are becoming less concerned about inflation. Now, I don’t think you want to have a huge allocation to gold unless you’re really, really concerned about inflation, and I’m not. But gold also does two other things, which make it worth having in the portfolio in small amounts:

  1. It’s diversifying as it behaves differently than paper assets.
  2. Exposure to gold is also a useful strategy to take advantage of the negative real-rate environment. Typically, gold is a beneficiary when real interest rates become negative as this lowers the opportunity cost of holding the metal.

Market Realist – One of the strongest drivers of fair trade in gold (or IAU) is real interest rates. A country with negative or low real rates of return, where the inflationary rate—consumer price index (or CPI)—is higher than the existing interest rates, always experiences a rise in gold in its currency. The tipping point of gold appreciation is when real interest rates go above the 2% mark. This is when you should think of exiting gold (GLD) and silver (SLV) investment strategies. The following graph illustrates how gold performs well in a low real interest rate environment.

Market Realist – It’s important to understand that investing in gold miners (GDX) isn’t the same as investing in gold. While it hasn’t been the general practice in the industry, some gold miners hedge their gold production to protect themselves from price drops in the metal. Earlier in the year, several large miners such as Barrick Gold (ABX), were contemplating the idea of hedging production to avoid a similar hit as the one taken when prices plunged almost 30% last year.

Read on to find more about Russ’s assessment of Treasury Inflation Protection Securities (TIP).


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