INVESTING STRATEGIES FOR INFLATION

By on Mar 30, 2011 in Advanced Investing, Economics, Guest Post, Investing | 28 comments

Guest article by LaTisha D Styles, a finance graduate teaching young adults how to Manage Your Money Like a Banker at Financial Success for Young Adults. You can find more from her at www.FSYAonline.com.

Yes, it’s coming. That looming certainty. Rates will rise, prices will increase and milk will cost an arm and a leg. We are already seeing the beginning effects of it.

What causes it?

Too many dollars chasing too few goods. Remember that girl in school who always had three or four guys to choose from for Friday night dates? The guys went out of their way to do more and more extravagant stunts to impress her. Buying flowers, crushing the competition in football, tripping her when all else failed. You get the idea. Well that’s the same idea behind inflation. When the government prints more money, there is more inflation. Selling government bonds is one way that they print money and government spending is another way.

It’s Inflation. Yes there are ways to prepare for inflation by stocking up on essentials, but what about your portfolio? How do you inflation proof your portfolio? There are two really easy ways to take advantage of inflation, especially if you are willing to take on a little risk.

Buy Commodities

Commodities like gold and silver benefit from inflation. That’s because smart investors know that these physical commodities will hold their store of value. I have a friend that buys silver bars regularly. When the recession hit in 2008 and once things eased up a bit in 2010, he sold them for a nice profit.

The price of gold has been steadily rising. At GoldPrice.org, you can see the price of gold in dollars per ounce since 1971. Monthly Gold Price During times of recession, the price of gold increased. In the 80′s, it hit a high but the recent “Great Recession” created fresh highs in the price of gold. No one knows when the price of gold will begin to drop, but I do know that when I see the next bubble burst, I will be ready to buy.

Buy and Sell Currency

When banks print money, i.e. make loans, they are causing the value of their currency to fluctuate. The federal reserve controls the fiscal policy and the incentive behind printing money by changing the discount rate. Banks print more and more money and you can benefit from the fiscal policy changes caused by inflation by trading currency.

Despite the negative connotations that surround the foreign exchange market, it’s one of the last places that small investors can still trade. There are accounts that allow you to get started trading for as little as $25 dollars. There are no trading fees besides the spread. For these reasons more and more investors are beginning to see the foreign exchange market as a viable investment vehicle.

If you expect inflation in the U.S. Dollar, for example, and you think the Australian Dollar will be stronger, then you would buy the Australian Dollar and sell the U.S. Dollar.

Both of these strategies are high risk for investors without knowledge of the commodity and forex markets so you should learn more about each of them before you make any decisions for your portfolio. As always, consult your financial advisor before making any decisions. 

Barb’s remarks; This is an extremely advanced strategy and should only be practiced with money you can afford to lose. Real estate is also a hedge against inflation. Buying non-perishable items in bulk when on sale can not be underestimated. Consider generics instead of name brands for all of your shopping needs. That includes store brands in the department stores as well as the grocery.

What did I miss? Do you have an investing strategy for inflation?

    28 Comments

  1. Currency trading sounds risky to me. It seems like the big players will have a much better shot at it than individual investors. How much commission do you pay to trade currency? I have only done currency exchanges and I hate the difference between buying and selling rate.

    retirebyforty

    March 30, 2011

  2. There is no commission for each transaction. Your only cost is the spread between the prices on either side. For example the price to buy may be 1.3203 and the price to sell may be 1.3200 so your cost to trade one lot would be .0003.

    It’s true that larger investors have an advantage but the nice thing about the currency market is that the market is so huge that no large trader can influence the price and so insider trading and market manipulation are non-existent.

    LaTisha @FSYAonline

    March 30, 2011

  3. I love any ideas about investing that beat inflation. And I agree that these can be ways to beat inflation…but as you state at the bottom, commodies trading and currency speculation is very risky. I personally dont partake in any of this. The ONE expection I would make, is that if I lived in or around New York, I would probably open a Renminbi/Yuan account at the Bank of China. It’s currently only for New York residents I think, or you would have to fly there to open one up in person, I forget which it is. I think as far as risk is concerned, most people agree they will eventually have to raise the Chinese currency despite their efforts to keep it low.

    MoneyIsTheRoot

    March 30, 2011

  4. Commodities can be a good hedge against inflation. I get a bit concerned with silver though because of all of the allegations of manipulation by some big banks **cough JP Morgan cough**.

    Personally, I would prefer to invest in companies with exposure to specific commodities as opposed to investing in the commodity itself.

    Dave @ Money In The 20s

    March 30, 2011

  5. Great article. There aren’t enough bloggers talking about this. I’ve considered buying commodities, but don’t feel like I know enough about currency exchanges to even consider that.

    One thing that anyone can do is to stock up on necessities that they believe are going to go up in price. You can do this over time by watching sales and using coupons and then you’ll have a nice stockpile of lower priced goods to choose from when prices spike.

    Julie @ The Family CEO

    March 30, 2011

  6. I agree that we need to look outside the box to find alternative investments. So many of our “diversified” investments go in the same direction during market crashes that you aren’t truly diversified…

    Good points to make us all think!

    Dr Dean

    March 30, 2011

  7. Nice post latisha. I often write posts like this because I find the effects of inflation very interesting and profitable. Currency trading is a way to invest with inflation in mind and it can be done accuratley if you follow the way the government is handling the infaltion(ie. Interest rates). However it can be risky, so I tend to like commodities and suppliers of commodities(that are traded on the exchanges). I liked this post a lot because it included useful economic information.

    jeff

    March 30, 2011

  8. @MoneyistheRoot China would definitely be a good play for the expected rise in their rates. I would probably do the same if I had access as well.

    @Dave That is also a smart way to hedge for inflation with a little less risk

    @Julie You’re absolutely right! That’s something that Barb suggested as well.

    @JT Micro caps huh? I’ve never looked into them. I guess I’ve always considered them risky lol. But I really want to get into options more.

    @Dr. Dean It’s true. So many people forget how to truly diversify

    @Jeff thanks! Yeah, one I learned about the balance of trade and how it affects our currency I was hooked.

    LaTisha @FSYAonline

    March 31, 2011

  9. I found your guestpost through Yakezie and enjoyed reading your article. I have a friend who is starting an ATM dispensing gold machine. Perhaps once his business launches, you could do a product review for him :)

    Kevin Yu

    March 31, 2011

  10. Currency trading is quite difficult since you need to evaluate the relative value of two financial instruments. Why would you want to add a leg to your analysis when you already came to the conclusion that you needed to guard against inflation? US interest rates go up as inflation goes up. This would make bonds go down. Since longer dated bonds will be affected the most, you want to buy an instrument that goes up as bonds go down. There are ETFs out there like TBT and TBF that would let you profit directly from your expectation. So, let me ask again. Why would you want to add another element of risk by evaluating the economic prospects including inflation of another country’s currency?

    ctreit

    March 31, 2011

  11. Trading currencies is quite difficult since you need to evaluate the relative value of two financial instruments. Why would you want to add a leg to your analysis when you already came to the conclusion that you needed to guard against inflation? US interest rates go up as inflation goes up. This would make bonds go down. Since longer dated bonds will be affected the most, you want to buy an instrument that goes up as bonds go down. There are ETFs out there like TBT and TBF that would let you profit directly from your expectation. So, let me ask again. Why would you want to add another element of risk by evaluating the economic prospects including inflation of another country’s currency?

    ctreit

    March 31, 2011

  12. Beware of currency trading because this is speculation and not investing. It’s a zero sum game and you could lose more than your initial 25$ because you are leverage 100:1 in some cases!

    BeatingTheIndex

    March 31, 2011

  13. “I have a friend that buys silver bars regularly. When the recession hit in 2008 and once things eased up a bit in 2010, he sold them for a nice profit.”

    Where do you sell physical Silver and Gold for market value?

    Todd

    March 31, 2011

  14. I completely missed the boat on purchasing commodities and will have to wait for the bubble to burst. I like the idea of buying and selling foreign currency, but it does seem a bit risky – you’d have to time the market just right. Thanks for these tips.

    Little House

    March 31, 2011

  15. With commodities, you have to be fairly sure of the level of future inflation. It has become so easy for the average investor to hedge against inflation in this way that commodity prices surge at the very hint of inflation.

    Thanks for writing about a topic that is often ignored.

    Khaleef @ KNS Financial

    March 31, 2011

  16. I tend to agree with CTREIT and beating the index. Currency trading is extremely speculative. It’s impossible to predict the future and the economy can change quite rapidly. Modern portfolio research favors a diversified asset allocation with international stock index funds, USA stock index fund, and broad based bond allocation (although probably wouldn’t put new money in bonds now with interest rates so low). When you invest in large multinational companies, you are indirectly gaining exposure to currency activity as many large companies hedge their currency exposure.
    Good idea to speculate with money you can afford to lose.

    Barb

    March 31, 2011

  17. @Latisha and all commenters-You have all raised some thought provoking issues. I really appreciate the discussion.

    Barb

    March 31, 2011

  18. There has been suspicion of manipulation in the gold & silver markets for quite some time, and I don’t like the premium you have to pay on precious metals. If you put a portion of your investment portfolio in commodities and companies that produce commodities, I think that’s a good hedge against inflation. Metals used in construction could do well during inflation. We have about 30% of our stocks in those types of companies. There is still some risk, but not as much as in dealing in currencies, IMHO.

    Maggie

    April 1, 2011

  19. @Maggie-Wow, 30% seems a high percent to focus on metals and commodities companies. As I frequently trumpet, I’m a fan of broad international diversification. My bent is to stick less with individual holdings an more with diversified index funds and etfs. Less overall work and solid long term growth opportunities. Thanks for your perspective Maggie.

    Barb

    April 1, 2011

  20. I don’t know about buying and selling currency for most people. Seems highly risky, complex, and costly. I’d prefer to see the purchase of commodities (ETFs), or durable goods. Heck, buying a house at this point with the market depressed, low interest rates, and potentially runaway inflation might just be the best decision you could make.

    Pat S.

    April 4, 2011

  21. @Pat-I gotta say, I am a fan of real estate. I think if you buy right, get a low interest rate mortgage (like now), it is a wonderful long term investment.

    Barb

    April 4, 2011

  22. I am also a fan of real estate, gold and silver both physical and through mining stocks, as well as holding stocks in companies of items that I purchase. For instance, the recent inflation in the price of gasoline and energy means that energy stocks should be used to offset some of that cost of living increase.

    optionsdude

    April 5, 2011

  23. @Optionsdude- Love the name “optionsdude.” All are important sectors to watch. But it’s also important to remain diversified as sectors rotate quickly and if you are too invested in one sector you could get slammed. Thanks for the visit.

    Barb

    April 5, 2011

  24. @ ctreit – The two ETFs you mention are inverse, or double inverse. In much the same way you can ask, “Why would you want to add another element of risk by evaluating the economic prospects including inflation of another country’s currency?” I can ask, “Why would you want to add another element of risk by choosing ETFs that are dependent on movements in the underlying just as they are dependent on magnitude and time it takes to move a certain direction?”

    With both inverse and double inverse ETFs you run the risk that the market moves in your direction, but that daily compounding distorts results in such a way that you make the correct call, but the ETFs move in the opposite direction.

    When you play a currency pair, you stand to profit as long as the market does move in your direction. When you play a inverse and double inverse ETFs, you profit as long as 1) the market moves in your direction and 2) as long as it does so in a slow, sustained fashion.

    JT McGee

    April 10, 2011

  25. All inverse and leveraged ETFs eventually go to zero. It’s the dangerous phenomenon of drawdown that creates such an environment, and to suggest to anyone that they should make long term trades with either security is reckless, to say the least.

    There’s a reason FINRA jumped all over inverse and leveraged ETFs last year–and it’s because people are buying them not knowing the inherent dangers they create.

    JT McGee

    April 10, 2011

  26. @JT-Great drill down of some complex investing concepts. As your comprehensive answer implies, these types of investments are not for the average investor. I welcome your discussion of the inherent risks in leveraged investments. Thanks!

    Barb

    April 10, 2011

  27. Nobody ever talks about the roll of inflation in creating inequality in society. Not only is this tread bad for capitalism. But it can create a state of dependency. Whenever wages fail to keep pace with prices consumers can do one of four things. Borrow more in order to compensate for the declining value of their wages adjusted for inflation. Cut back on spending. Work more hours by getting another job. Or depend more and more on friends family private charities or government for their basic needs. Non of the options are particularly attractive. May I add one other thing to the commentary. Contrary to popular belief. The so called notion make people dependant on government and you will change their behavior for the worse. How about the reverse. Increase the wages of your employees by less than the increase in prices and you are almost guaranteed to make them more and more and more dependant on friends family private charities and the government for their basic needs over time.

    Financial Directory

    October 31, 2012

  28. @Financial-With recent inflation so low, it’s easy to forget how damaging it can be. Thank you for bringing up the income inequality issue. Those with fewer employment options can be hurt so deeply if inflation advances at a faster rate than wages. Borrowing to maintain basic living expenses has become an unfortunate reality for 25% of our society.

    Barb

    November 1, 2012

Trackbacks/Pingbacks

  1. Money Minute: Brazil's Emerging Economy - […] in Brazil like Petroleo Brasileiro (PBR) or an ETF based on the economy like EWZ. However, with the rising …
  2. Economic Analysis for Forex - […] a previous controversial article I wrote for Barbara Friedberg Personal Finance, I mentioned an inflation strategy trading foreign exchange. …
  3. 3 Ways to Reduce Your Exposure to Inflation | Cash Loans Online Company - […] are many different strategies for investing to fight inflation. Some of the commonly recommended investments are commodities and stocks. …
  4. HOW TO CAPITALIZE ON THIS ECONOMY | Barbara Friedberg Personal Finance - […] scenario has it’s pros and cons. During the late 1970′s and early 1980′s inflation was rampant causing interest rates to …

Post a Reply

Your email address will not be published. Required fields are marked *

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

WP-SpamFree by Pole Position Marketing