Inflation has been a pretty trendy topic lately. In recent months, the consumer price index (CPI) has risen to levels not seen for a long time.
Everything from food to gas to housing is significantly more expensive and things don’t seem to be slowing down. Rising inflation can reduce your purchasing power, but that doesn’t mean that everything is lost.
An inflation hedge is an investment considered to protect the decreased value of a currency, made by investing in safe-haven assets. Through these investments, the purchasing power of capital for the future is “secured”.
Inflation hedging can help protect the value of an investment and even if some investments seem to provide a decent return, it is possible for them to be sold at a loss when inflation is factored in.
Below we share our top 4 ways to keep on your watch list and hedge against inflation and help your portfolio thrive.
When prices rise, real estate prices rise too. Furthermore, homes will always be in high demand. As a result, real estate is an inflation hedge regardless of the economic climate.
Income from real estate that, for example, is rented out is an excellent way to get some protection against inflation. As inflation increases, so does the value of properties and the amount that a landlord can charge for rent. This means that landlords earn higher rental income over time. Over a long period, houses, flats, and buildings have been a good hedge for an investment portfolio against inflation.
If products or services become more expensive in society, companies’ costs will also increase. They will compensate for this by increasing their prices themselves. In this way, companies can have the same profit over a longer period. A profit that largely affects the company’s value and, as a result, the share price.
In the event of inflation, the stock market will generally increase. If, on the other hand, the increase in value “catches up” with inflation, it largely depends on how quickly inflation changes over time. In any case, it’s better to have shares than to have the money “under the mattress” in times of inflation.
That shares “rise” in value during inflation, on the other hand, is somewhat wrong. The increase in value is in many cases only compensation for inflation and not a real increase in value.
Opinions differ on gold investments, but there’s no doubt that it’s one of the favorite ways to hedge against inflation. Gold is a real asset and as such, it is not sensitive to inflation.
Gold has been used extensively as security and protection against inflation as long as money has existed. Since gold has no credit or standard risk at all, the precious metal has kept its value very well over time. Nowadays, investors invest in gold mainly through online trading, as waiting times to receive the delivery of gold bars can take 6-12 months. The easiest way to hedge the gold portfolio is by buying a gold ETF such as Xetra Gold or ETFS Physical Swiss Gold.
It’s also more convenient with gold trading, as you do not need any storage, risk during shipping, or have to wait to find buyers if you want to sell. If you want to sell pure gold, an intermediary should normally take a few percent of the increase, so it rarely pays to own the gold physically. The majority now trade gold as CFD.
Oil is seen both as an inflation hedge and a “signpost” for the direction in which inflation develops. If inflation is expected to rise, oil prices are also expected to rise. This is based on the fact that oil is such a fundamental part of both infrastructure and production. If prices generally rise in society, the oil price will follow. Consequently, investors can expose their capital to the oil price in the event of expected increased inflation.
On the other hand, investment is rarely made directly in oil. As a private investor, it is much easier to get exposure to the oil price via, for example, certificates and CFDs.
Keep in mind that volatility is high in oil. In addition, the price is affected by a large number of different factors, of which inflation is only one. If investments are to be made as an inflation hedge, oil can be part of the portfolio, but not a predominant part.
Inflation is a normal occurrence in a market economy and a risk every investor faces. Luckily, there are many valuable ways to hedge against inflation. These are worth knowing when inflation hits to help your portfolio thrive despite the circumstances.