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A dollar today cannot buy the same value of goods that it bought ten years ago, and it would not have the same value in the next ten years. This change is due to inflation, which is a natural occurrence in the market economy that increases prices and reduces the value of currencies. With this in mind, many investors look out for assets that will protect them against inflation.
It’s important to plan for inflation by investing in assets that either retain their value or outperform the market during market downturns. Then, you should invest in them when you see that a wave of inflation is about to hit, allowing you to make a profit and protect your investments.
Let’s take a closer look.
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Gold As A Hedge Against Inflation
Many investors will agree that gold is the simplest asset to hedge against inflation. It has been considered an inflation-proof asset and an alternative currency, especially when the native currency of a country is losing value. Many countries hold their reserves in gold or use gold as their currency when their own have failed. Gold is a tangible and physical asset that always holds its value, so it is known as a store value.
But, it’s important to note that holding onto gold does not pay any yields but will only act as a store of value. You can only rest assured that once the period of economic uncertainty is over, your gold will still have a high value, sometimes even higher than you bought it.
Pros & Cons of Gold Investments
Pros
There are different advantages of investing in gold. This asset is especially ideal for those that want to diversify their portfolio and protect their money during market downturns.
Cons
Despite the benefits of gold, this precious metal also has some downsides, like limiting your earnings and short-term volatility.
Why Gold is a Great Diversifier
Aside from gold being a protection against the decline in other asset classes, it is also a great option to diversify your portfolio. This is because gold has a low correlation with most types of assets like stocks, bonds, real estate and more. Gold has a low correlation with the stock market performance, and it moves in the opposite direction of the dollar. Based on this, gold can protect your portfolio from complete losses during inflation.
Ways to Invest in Gold
There are different ways you can invest in gold if you want to start hedging against inflation. These include:
Physical Gold
You can invest in gold by owning gold bullion and coins. Gold bullion is any form of pure gold which has a certification for its purity and weight. You might notice a serial number on your gold bars, and while they are valuable and have an impressive size, they aren’t very liquid. For instance, if a gold bar is worth $100,000, you need to sell all of it and can’t sell only part of it. If you have a small capital, you can consider investing in smaller-sized bars and gold coins.
Gold Jewelry
About 49% of the gold being produced globally is used to make jewelry. So, if you want to hold gold and also wear it, you can consider purchasing it. It’s recommended to buy this gold from auctions and estate sales rather than jewelry. Keep in mind that jewelry is not profitable as an investment because you might buy it at a price higher than the actual gold.
Gold ETFs and Mutual Funds
If you don’t want to own gold physically, you can invest in gold-based exchange-traded funds and mutual funds. This allows you to track the price of a fixed amount of gold, like one-tenth of an ounce. You can buy and sell the ETFs like stocks and gain profit.
Gold Futures and Options
Another option is gold futures, which is a contract to buy or sell gold at a later date in the future. The contracts are fixed and have a specific amount of gold. While futures involve low commissions, it is quite complicated and deal with large amounts, so it is better for experienced investors.
Stocks from Gold Mining Companies
Another way to invest in gold without owning gold bullion is with stocks from a gold mining company. You can buy the stocks from a company that specializes in mining and refining gold. Your profit depends on the performance of the company.
Gold IRAs
If you’re preparing for retirement, you can consider opening a gold individual retirement account which is a specialized type of IRA. The gold IRA allows you to hold gold in your retirement account, and you can open this or roll over your existing IRA through a custodian. The custodian and gold company will store your gold, and you have to follow the rules for purity, distribution, contributions and taxation.
Gold Investment Companies to Start With
Whether you want to buy physical gold and get it shipped to your home or a storage vault, or you want to open a gold IRA, you need to work with a reliable company. There are different gold investment companies, many of which provide IRAs by partnering with custodians. Here are our top three options:
Augusta Precious Metals (WINNER)
Augusta Precious Metals is a highly-rated gold investment company and should be your first choice when preparing for inflation, although its high minimum amount is a discouraging factor. The company offers top-notch customer service through one-on-one account lifetime support. It provides physical purchase of different precious metals and gold IRAs and is ideal for beginners.
#2. Goldco
Goldco offers only gold and silver, whether you are opening an IRA or buying physical metal. It provides a strong buyback program for those that want to see gold and flat fees on storage and maintenance. The minimum investment amount is affordable too.
If you’re on a budget, you can start investing in gold or open a gold IRA with American Hartford Gold at $5,000. The company offers all kinds of precious metals and promotions like waiving its fees for maintenance, insurance and storage for your first three years. There is also a price match guarantee when selling your gold back.
Other Inflation-Proof Assets
Aside from gold, there are other assets that you can consider investing in when protecting your money from inflation.
Real Estate Income
If you own a real estate property that you can rent out, you’re ready for inflation. As inflation rises, landlords can charge more for rent, and this would increase your rental income. You won’t lose the value of real estate during inflation, so it is a safe bet. This form of investment allows you to keep pace with the increasing inflation.
Despite being a hedge against inflation, real estate is expensive to purchase, and you might need to get a loan to complete the transaction. Also, it’s hard to sell real estate quickly, and if you do so, you will lose money. There are other costs like maintenance, management and property taxes involved in owning real estate.
Real Estate Investment Trusts
Real estate investment trusts are companies that own real estate with the money gotten from investors and will give out dividends constantly. The company can own apartments and condos, and since rental income and property prices increase with inflation, you can get even higher cash flow during inflation.
While you can get constant cash flow from REITs without even having to own property directly, there are some downsides to keep in mind. For instance, the share prices of REITs can become lower when interest rates rise because investors will be interested in alternatives like treasury securities. Also, you need to pay property taxes, and when is a high yield, you will also pay income taxes.
US TIPS
TIPS stands for treasury inflation-protected securities, and this is a type of US Treasury bond. As the name implies, it is indexed to inflation to protect the investor. It offers a payout twice a year at a fixed rate, and the value of TIPS depends on the inflation rate. You can choose TIPS that mature in five, ten or thirty years.
While TIPS are an attractive investment during times of market uncertainties, there are some disadvantages. The principal amount will reduce if there is deflation, leading to less value. TIPS are sensitive to interest rates.
Commodities
Another option to protect you during inflation is commodities. Commodities include real estate, precious metals, natural resources, raw materials, crops, foreign currency and more. It is a broad category and an indicator of inflation to come. When the prices of a commodity increase, the prices of its end product will also increase, leading to inflation. You can also own commodities through ETFs.
The main downside of investing in commodities is their volatility, as their value depends on their supply and demand.
Floating-Rate Bonds
While bonds mostly offer a fixed payment, you can prevent this with a floating-rate bond. This is a bond in which the payout increases in response to rising inflation. You can buy floating-rate bonds through mutual funds and ETFs. It would also diversify your portfolio and reduce your investment risks.
FAQs
What is the best hedge against inflation?
The best hedge against inflation depends on your investment goals, but gold is a popular answer. Gold is widely considered a protection against market uncertainty because it moves opposite from the dollar and will act as a store of value.
How does inflation work?
Inflation is the rising prices of goods and services over time in an economy. It is measured with the inflation rate, which looks at the percentage of change in prices from one year to the next. It occurs when the amount of goods and services that you can buy with your currency decreases, meaning that you won’t be able to buy as much as you could before.
How does inflation lower the buying power of money?
Inflation lowers the buying power of money by increasing the prices of goods and services. When this increases, you cannot buy the same with a single unit of currency that you could before. This causes the cash to lose value.
Conclusion
If you’re preparing for inflation, you should consider diversifying your portfolio with gold and other assets mentioned in this guide. Rising inflation is always concerning for investors, so it is best to purchase alternative assets like gold, commodities, real estate, and TIPS to protect your cash from further devaluation. Before choosing any inflation-proof asset, you should do your research.