What is inflation anyway?
Firstly you need to understand what inflation is before you can learn how to protect yourself against inflation. To cut things short inflation is the expansion of the money supply (cash and deposits) which causes a rise in prices. It is not simply an increase of the price itself as the current dictionary definition states. We go over the definition of inflation, inflation charts over time and is it good or bad thing etc., in the article What is inflation? The true definition and why it should matter.
Please note that the advice suggested here is based on research and experience and may not be suitable for all investors. Consult your financial adviser to independently verify the information you find on this site before considering any of these investments.
The standard rules on how to protect yourself against inflation
If you are looking to invest
Generally speaking you would need to take note of what the rate of inflation is at the time and make sure that any investments you make exceed the inflation rate. So for example if the standard rate of inflation is 2% in a year you would make sure to invest it in something that will give you back the 2% and more to exceed the rate of inflation.
For everyday living
Protecting yourself from 2% inflation is one thing, but higher inflation like 10% a year or more needs some more thought and explanation which we will go through in this article.
Official government inflation numbers are inaccurate
Be aware that sometimes governments want to paint a far rosier picture of how things are in their own countries for various reasons. Either re-election or they do not want to face their constituents or they want to pay off the government debt more easily or a combination of everything.
For this reason they say that inflation is lower than it actually is. The best thing to do is to get accurate numbers for your own country.
Where to get an accurate inflation rate
In the case of the US Professor William Barnett from the Centre of Financial Stability measured the United States broad money grew by 28.9% in December 2020. You can access the December 2020 report here and look up the Divisia M4 number. Note the inflation rate is higher than usual since 2020. Governments have tried to stimulate the economies by printing money.
How to protect yourself against inflation
There are traditional ways of hedging against the inflation risk and now there is also Bitcoin and some other cryptocurrencies. Here we will outline traditional ways of protecting a portfolio against the inflation risk and what some experts are saying.
Bitcoin as a hedge against inflation
Of course Bitcoin has been called a lot things; a speculative asset, a store of value and a way an inflation hedge. It is could be considered all three things at once.
Let’s put it this way, as of the time of writing this article the Bitcoin price is around $40,300 or €33,400 which is around a 43,151.52% price increase since it’s 2013 price. There is no other asset that has had a better performance than Bitcoin over the past 10 years since its creation.
Chart sourced from CoinMarketCap.
It is good to have a small portion of Bitcoin in an investment portfolio because it is starting to get some large institutional investment into it. The price will fluctuate, and sometimes it will go up and down wildly. However it should start gaining some more stability with time and will continue to rise.
Bitcoin is the “fastest horse”
There are quite a few investors that have a small percentage amount allocated to Bitcoin in their portfolio. However if there is very high inflation they would want to own more of it. Why so? Paul Tudor Jones a well-known hedge fund manager famously said, Bitcoin is “the fastest horse”. So if you want to keep up with inflation Bitcoin could be considered as a way to do just that.
If you are considering buying bitcoin or any other cryptocurrencies and got financial advice, have a look at our exchanges page which lists the top exchanges where you can purchase them.
Once you have bought your cryptocurrency the best thing to do would be to remove it from the exchange once you purchased it. Why?
- Just in case your account gets hacked
- The exchange goes bankrupt and you lose your crypto like what happened to Mt. Gox
The best thing to do would be to have it stored on a hardware wallet which keep your crypto in cold storage. There have been no recorded cases of hackers stealing from hardware wallets, they are the best security you can purchase for your crypto. You can pick either Ledger or Trezor as a hardware wallet.
If you want to spend crypto easily then you can sign up for an account with a company which supports your fiat currency and crypto accounts. These companies will allow you to easily exchange and pay using their Visa or Mastercard. You can have a look at recommended companies that support debit and credit cards here.
Traditional ways of hedging inflation
When there is a crisis and the financial markets go down it does not mean that everything goes down at the same time. Some assets go up in price, you just have to know what to do. Of course you should always seek financial advice. Traditionally the following list is what has preserved wealth.
Gold is considered a safe haven asset, what does that mean? It means it is expected to keep its value or even gain value during major crisis periods. Gold tends to thrive when markets are experiencing uncertainty and distress. However gold has been a good performer overall since the year 1999 as it is in a bull market. All you need to do is have a look at the chart below:
Chart taken from goldprice.org
How will gold perform in the next few years?
Allan Hibbard an analyst at GoldSilver took the bull market of 1970-1980 and the one running now and superimposed them. The current bull market is taking 2.42 times longer to play out and is at 1.8 times the magnitude of the 70s and 80s.
The price target is for $11,250 per ounce for late 2023 which is quite a good run up from its current value. Have a look at the video Amazing gold chart signals $11,250 oz, but when? explaining how it all works out. It is a very fascinating and I recommend you watch it.
What you should not do
Whatever you do, do not buy ETFs which are also called paper gold like the GLD on the stock market. It will give you exposure to the price of gold, but it is not the real thing. ETF contracts far exceed the amount of bullion stored in the vaults to honour the contracts. This means that in times of crisis when people want to collect their gold and ask for it to be delivered some people will end up with nothing in their hands after they paid for it.
Make sure you buy physical gold from reputable bullion dealers. They will deliver the gold to you or you pick up yourself. Some offer fully allocated product where they provide storage and you pay insurance for them to keep it safe for you. The insurance to pay for gold storage is not that expensive. Bullion dealers should have details of costs on their web sites. At times there might be high premiums on gold or the price will spike when there is significant demand, so ideally you should have some gold before a crisis comes about or gets worse.
Silver does not generally do well whenever there is a market crash, perhaps because it is an industrial metal which is used in all sorts of electronics. Demand goes down during a period of crisis. The only time when it would go up during a market crash is when it is in a bull market (i.e. when its price is expect to rise).
At the moment the silver price is going up and there is talk that the silver price could go up far more as a percentage increase than gold will.
What you should not do
Same goes for silver as gold for all the reasons outlined previously. Do not buy ETFs or paper gold like the SLV on the stock market.
Buy physical silver from reputable bullion dealers. The same principles for buying silver are the same as the ones outlined for gold above.
Gold mining stocks are for those that want to compound their wealth. They tend to lag behind the gold price and usually have their best performance after the gold price has peaked. Since silver is also in a bull market the silver mining stocks could be considered this time around as well.
Mining stocks give you leverage, they go up much more than the gold or silver price would. On the way down they go down by the same amount they went up if not more. They are volatile so you need to make sure you know which stocks to get into and when to get into them.
Do your research before you get into any miners and ask for advice. You can have a look at our experts advice page should you need any recommendations for professional investors.
Commodities have traditionally done very well during inflationary periods. They also tend to do the opposite of stocks and bonds, if stocks and bonds are up they are down and vice versa.
An article on Reuters Commodities headed for bull market in 2021 on inflation fears, stimulus: Goldman Sachs outlines how inflation will be triggering a price increase.
Some commodities worth considering are oil, copper, nickel and agriculture. Uranium stocks can also be considered.
Real estate is expensive in most countries and nothing ever continues going up in price forever. Although real estate is considered a hard asset, it is a great place to put your money. Even more so, if you pay any heed to the principles of The Great Reset.
Real estate may go down somewhat or remain at a stable price in a crisis or inflationary period, but at least you will always have the contract in your hands and it will be yours until you choose to sell it. The added benefit of real estate is that it is a great way to get some passive income.
The draw back with it is that it is not so liquid and may not be sold so quickly at the current market value of the time. There are other forms of investment that are more liquid. The wise thing to do would be to have some diversity, that is – a variety of different assets.
Make sure you try to pay off any debt on your property that is on a variable rate loan. If you do choose to buy and use a loan make sure it is on a fixed rate just in case interest rates go up. At the moment interest rates are low and the way it might go is slightly down, sideways or up. Interest rates in the 80s hit 20% so keep that in mind.
No, stocks and bonds are not good protection against inflation
If you want to protect yourself against inflation stocks are definitely not a good inflation hedge. Bonds are usually fixed at low rates and not good either. The point is to outperform inflation after all.
If there is a crisis with high inflation and stocks were to go down by around 30%, it would take them several years if not a decade to regain losses. This is not a good strategy as investors want to make sure they are in a position where they make money no matter what. A 30% loss is a huge decrease in overall wealth.
Better to sell, buy something else that will appreciate in value and then go back to stocks when things are improving and the crisis period is ending. This will maximise wealth.
The only time stocks could go up is during a hyperinflation scenario, but that would mean that everything else will be outperforming them by a good margin.