Hedging Against Inflation

Investors can use a number of different strategies to hedge against inflation. Some common tactics are investing in hard assets that have a limited supply and financial assets that tend to see large capital gains when currency devalues and prices rise. Let us take a look at four strategies to protect your hard-earned wealth.

1. Equities and Exchange-Traded Funds

Equities as an asset class have strong upside potential in the long term, and many pay dividends, making them typical inflation hedges. Companies that require relatively little capital, and are not dependent on or deal in natural resources are usually your best bets in inflationary periods. However, stocks can be volatile and require active review and management.

ETFs are funds that track a particular stock index or group of investment types. They can be another way to gain exposure to assets that are likely to increase in value during times of inflation and increase diversification in an investment portfolio. ETFs are usually passive investments which may make sense for those who are new to investing or who are more hands-off on their investing. There are also ETFs that track gold, gold mining, equity indexes, bonds, and property/REITS, among many others. These provide exposure without requiring you to actively research and follow individual companies or products.

2. Gold

Gold has always been a store of value. Few assets have maintained their purchasing power as well as gold in the long term. Like real estate, gold is a hard asset with limited supply.

During short periods of rapid inflation, the price of gold rises sharply.

•  Between 1970 and 1974, the price of gold in US dollar amounts increased from $45 an ounce to almost $200 an ounce

•  During and after the recession of 2007 to 2009, the price of gold doubled from less than $1,000 in November 2008, to almost $2,000 in 2011.

• In 2019 and 2020, gold hit all-time record highs against many different government-issued fiat currencies.

Recent global events have most investors predicting that gold will only increase in value.

Investors wanting to invest in gold have many options. Physical gold coins and bars might be the most obvious example, although these are difficult to obtain and store safely. Another option is saving in a gold savings account or fund, although many of these savings accounts only offer owning “paper” gold and not actual physical gold. At Mercury Gold, we offer affordable storage for your physical gold, as well as a fractional savings program that is fully backed by physical gold. 

3. Real Estate Investment Trusts (REITs)

A REIT is a company that deals in real estate, either through owning, financing, or operating a group of properties. When you buy shares of an REIT, investors can also “invest” in assets that the company owns or manages.

REITs pay a dividend to investors who hold shares. Investing in REITs might make sense for investors as a potential inflation hedge because they are tied to hard assets-real estate. When inflation occurs, hard assets tend to rise in value against their local currencies because of limited supply.

Owning physical real estate—commercial or residential property—also works as an inflation hedge. But if one can’t afford to purchase, don’t wish to manage property, buying shares of a REIT is an easier way to get into real estate.

4. Cash Management Solutions

Rather than holding money at the bank for everyday expenses, consider utilizing Cash Management solutions to maximise returns while still maintaining liquidity. With the advances in fintech we have seen over the last decade, all investors now have access to these solutions, which utilize Money Market Funds to provide higher returns than Fixed Depositss with low risk and zero transaction fees. Some of these options include TNG’s GO+ and Kenanga’s KDI Save.

While your returns may still trail inflation, most offer interest rates in excess of 3.0%, a far better option than keeping cash in sub-1% bank accounts.