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Category: Economics

Which Investments Are the Best Hedges Against Inflation?

Inflation has long been a thorn in the side of investors, influencing where they place their money and how much they’ll get in return. The good news...

21 April 2022

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Inflation has long been a thorn in the side of investors, influencing where they place their money and how much they’ll get in return. The good news is there are ways to combat the negative effects of inflation, and this all starts with hedging.

Hedging against inflation is a sensible option for investors looking to safeguard their assets against loss of value. But how do you do it? And what’s involved?

In this post, we’re looking at the best hedges against inflation, covering what the inflation hedging process involves and the key things to consider. Whilst we are passionate about gold, we’re not involved in investments, so you can rest assured the information here is completely impartial.

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How to Hedge Against Inflation

To understand inflation hedging, you need to be clear on what inflation is and how it can affect the value of an investment. As a quick refresher, we’ve included a definition below, but please skip ahead if you’re already familiar with the term and its implications.

What is Inflation?

 Inflation represents the rate at which the value of a currency is falling, and the price of goods and services is rising. It’s a quantitative prediction that uses price changes over a range of products and services to give an indication of purchasing power within an economy.

So, back to the issue of hedging against inflation. Used by investors, it involves taking steps to protect an investment from the negative effects of inflation – retaining value where possible.

Without diversifying your investments to hedge against inflation, you might see losses. For example, if you’ve invested in something that’s increasing in value by 3% a year but inflation is 4%, you’ll see a -1% decrease in value.

That’s why hedging against inflation is such a popular tactic. It helps to retain the value of your investments even when inflation is on the up.

So, how do you do it?

Essentially, to hedge against inflation, you need to build a diverse investment portfolio that offers fallback against currency value change. That means investing in assets that aren’t easily affected by inflation, and which hold their value even in times of economic uncertainty.

Examples of assets that are typically used to hedge against inflation include gold, silver, and other precious metals, commodities such as oil and gas, stocks and bonds, and other physical assets, including real estate. We’ll look at the best inflation hedge investments in more detail below.

What Are the Best Inflation Hedge Investments?

Diversifying your investment portfolio is good practice for lots of different reasons, not least hedging against inflation. But what assets are best for safeguarding your investments against the effects of inflation?

Let’s take a look.

Gold

Gold is one of the most popular and well-documented inflation hedge investments. Why? It comes down to gold’s reliability and value retention, as well as its resistance to economic shock and uncertainty.

Generally, the value of gold outperforms or keeps pace with the inflation rate, so the risk of value loss is low compared to cash assets. There have been times, however, when the value of gold has fallen out of step with inflation, so it’s by no means a guaranteed silver bullet against future inflation.

Silver

Silver protects against inflation in the same way as gold. Since it’s a precious metal, and thus a tangible, physical asset, it’s widely considered a safe place to put your money when inflation is on the up.

Like gold, however, silver offers no guarantees against inflation. Indeed, the reason gold is often favored is that silver’s value is more volatile, with more external factors affecting its day-to-day price.

Commodities

Commodities like energy, food, and other essential services are rapidly becoming a popular inflation hedge. And when you think about it, this makes sense, because inflation is driven by the rising cost of goods and services compared to purchasing power.

As inflation rises, so too does the value of commodities and the share prices of companies that provide them. So, investing in commodities such as oil, gas or food can be an effective way to hedge against inflation – provided you choose the appropriate goods and services to invest in from the outset.

Stocks

Investing in stocks can be a safe way to protect your money from inflation, but you need to perform the appropriate due diligence and buy into the right businesses. Remember that, as inflation rises, most companies need to increase the retail cost of goods and services, meaning that your investment should, in theory, keep pace with inflation.

That said, there are no guarantees with stocks, and price volatility is much higher than with precious metals like gold and silver. Still, if you invest wisely and are willing to accept the risk of value liquidity, investing in shares can be an effective way to hedge against inflation.

Real Estate

Real estate is another inflation hedge that has proven increasingly popular over the past two decades or so. Given that property prices generally increase when inflation is on the rise, buying domestic or commercial premises is a safe bet to combat value degradation.

Of course, there are lots of ways to invest in real estate, and some (e.g., becoming a landlord) are more hands-on than others. You can invest in real estate without any long-term commitments, typically through a real estate investment trust (REIT) which effectively treats property like a stock or exchange-traded fund (EFT).

 

At Glint, we make every effort to demonstrate a balanced conversation between gold, crypto and fiat currencies when it comes to purchasing power and, while we strongly believe that gold is the fairest and most reliable currency on the planet, we need to point out that it isn’t 100% risk free. While we have seen a steady increase over time, the value of gold can fall, which means that its purchasing power can also decline.
 
To learn more, visit our homepage or give us a call at +44(0)203 915 8111.

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