Special Report: The Best Hedges Against Inflation

What do houses, wheat, used cars, sugar, gasoline, lumber, and copper have in common? 

The price of each is up more than 10% from a year ago. In fact, some of the above items have doubled in price from a year ago. 

After more than a decade of stagnant prices, inflation is back — with a vengeance. And that has some important implications, both positive and negative, for investors. 

But before we get into those implications, we should probably discuss what this inflation spike actually is and why it’s happening now. 

Why Prices Are Suddenly Skyrocketing After a Decade of Stagnation

In April, the Consumer Price Index (CPI) lept nearly 4.2%, blowing out the consensus estimate of 3.6% and marking its fastest pace of growth since 2008. 

Urban Consumer Price Index

Source: https://fred.stlouisfed.org/series/CPIAUCSL 

This jump follows years of unusually low inflation, when the Federal Reserve, despite its low-interest-rate lending policies, failed to boost annual CPI growth to its 2% target. 

So what changed? 

COVID-19 certainly played a large role. Many consumer expenditures, including auto purchases and rent, are simply seeing a rebound following unexpected stagnation or decreases in 2020. 

The U.S. money supply has also seen an unprecedented increase of $4 trillion in the last year among all of the various COVID-19 relief packages. 

This, combined with a continuation of the Fed’s low-interest-rate “easy money” policies, has led to a situation in which the U.S. economy is drowning in dollars as consumer spending is picking up, and the result is a loss of value in those dollars. 

Many analysts, however, believe that there’s more to the current inflation spike than COVID-19. JPMorgan and Citibank have both published research suggesting that global commodity markets are rebounding after a 10-year-long bear market. JPMorgan went as far as declaring a “fifth commodity supercycle” underway when discussing oil’s recovery to pre-pandemic highs. 

In sum, the sharp uptick in inflation appears to be the result of a multitude of factors, and it could persist for years to come. 

There are several asset classes that are known to outperform broad markets in times of high inflation — the most well-known of which has long been prized as a hedge against the steadily declining value of fiat currencies...

Gold as a Hedge Against Inflation

The value of the U.S. dollar was once tied to gold, and since the end of the gold standard in 1971, many investors have been investing in the yellow metal to offset losses in U.S. dollar purchasing power. 

As a result, the price of gold has been heavily correlated with the CPI, and the CPI has often led the price of gold by several weeks. 

In late 2010/early 2011, inflation saw a similar jump to the current one, with annualized CPI growth rising from just above 1% to just under 3.5% in the span of six months before cooling off again.

As you can see below, a person who traded gold at these inflection points would have earned an easy 40% return between November 2010 and May 2011. 

gold vs inflation

Source: https://fred.stlouisfed.org/graph/?g=jeNM 

With this in mind, the current inflationary moment might signal a good time to pick up a few shares of a gold fund like the SPDR Gold Trust (NYSE: GLD)

But the yellow metal isn’t the only investment worth looking at in times of high inflation...

Other Ways to Hedge Against Inflation

The safest inflation hedge investment — although not necessarily the highest-returning — is Treasury Inflation-Protected Securities (TIPS). 

TIPS are a type of U.S. Treasury bond that pays out twice a year at a fixed rate. Their principal values are indexed to inflation, which means that they cannot have negative inflation-adjusted returns and are guaranteed by the full faith and credit of the U.S. government. 

Like other types of Treasurys, directly purchasing TIPS is somewhat inconvenient for individual investors, and many would be better served by investing in a TIPS fund like the iShares TIPS Bond ETF (NYSE: TIP).

A middle-risk choice for inflation hedging, one that is a bit more exciting than TIPS but less volatile than gold, is real estate. 

Property prices and rents both tend to rise along with inflation, as we discussed at the beginning of this report. And many real estate investments provide both income and capital gains, helping investors offset the loss of purchasing power that often accompanies periods of high inflation.

As with TIPS, real estate is an inflation hedge that is most accessible in the form of a fund rather than individual units. It doesn’t make a ton of sense to buy a second house because you’re worried about rapid CPI growth, but putting a few dollars in a real estate investment trust (REIT) like the Vanguard Real Estate ETF (NYSE: VNQ) could be prudent. 

Vanguard Real Estate

As you can see above, both VNQ and TIPS have held relatively steady over the last few months of accelerating inflation. It’s worth remembering that the relatively “boring” performance of these two assets is doing exactly what it’s supposed to do: protecting investors’ capital from inflation. 

Wealth Daily’s Inflation Watchlist: SPDR Gold Shares ETF (NYSE: GLD), iShares TIPS Bond ETF (NYSE: TIP), Vanguard Real Estate ETF (NYSE: VNQ)

Ultimately, however, one of the best and simplest ways to insulate yourself from the effects of currency depreciation is… to acquire more currency. Income investments protect you against losses in purchasing power by fattening your bank account. 

Wealth Advisory subscribers know this better than anyone. Editor Jason Williams currently boasts an average gain per trade of more than 140%.

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