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Tuesday, February 09, 2010

Part 1 Gold: Five Investments for Higher Inflation

My recent article titled "ECRI Global Inflation Outlook - Higher Inflation Ahead" showed that inflation pressures are building globally. In the United States, December CPI came in at 2.7%.

Just last week, ECRI, the Economic Cycle Research Institute, said "With the USFIG now advancing for ten straight months, underlying inflation pressures are in a sustained cyclical upswing, promising higher inflation in the coming months." Even in Japan, the threat of persistent Japanese deflation "continues to recede."

In this series of article I will discusses five investments that should do well in an environment of higher inflation. These are
  1. Part 1: Gold
  2. Part 2: Cash
  3. Part 3: Series I-Bonds
  4. Part 4: TIPS and TIPS Funds
  5. Part 5: Commodities
Part 1 Gold

Gold is the traditional investment people use to hedge for high inflation. Gold is also a popular hedge for an "Armageddon Type" disaster but I prefer a portable water filter that I can use to make clean drinking water to trade for whatever I need.

Obviously Gold was a much better investment ten years ago when it was 79% lower.

Click chart courtesy of for full size image

Gold's price may have already anticipated future inflation. After all, the US and most other nations have been running budget deficits for a decade while gold has soared. Also, if you need more gold, you can hire people to dig it out of the ground for you. This could increase supply if wages remain low relative to inflation. Of course, if governments across the globe continue to spend like crazy and print money, then currencies could crash and gold would soar far higher.

How to Buy Gold
  • You can buy gold bars and store them yourself. Don't forget the cost of insurance, security systems and storage costs when calculating your return.

  • You can buy gold coins and store them yourself. There is usually a large amount lost on the "bid ask spread." That means if you pay a dealer $1,000 to buy a gold coin, make sure to ask what he's willing to buy it back from you for. Before he knows you are considering buying, ask what he'll pay you for the coin you are interested in.

  • You can buy gold mining stocks. With so many people willing to work for low wages around the globe, the cost of extracting gold from the ground might not go up nearly as fast as inflation. This would be good for gold mining stocks but maybe not for the metal itself. Of course, poor management or fraud could sink a gold mining stock even if gold soars so diversification is wise to spread specific stock risk.

  • You can buy the ETF (exchange traded fund) for gold which has the symbol GLD (GLD Quotes and Charts). This would be my first choice as a way to buy gold other than the few small pieces I have hidden around the house worth a few hundred dollars for emergencies.
Disclosure: I sold all my bonds and bond funds not indexed to inflation. Besides cash in many CDs and savings accounts, I own TIPS, TIPS mutual funds and Series I-Bonds. I also own and cover these investments in my newsletters. See Kirk's Two Investment Letters for more information.

Charts and current quotes for:

Next: Read the next article in the series "Five Investments for Higher Inflation: Part 2: Cash"

Gold Quote:



  1. kirk,

    since you hold tips in a fund, wouldn't it make more sense to wait and buy the shares when inflation is driving the yield up? that would decrease the nav, if you buy tips now won't you pay a higher nav while getting a lower yield? then when inflation kicks in the yield would rise but as mentioned the nav would drop.

    am i missing something?

    tom gallucci (tjg911)

  2. Tom, Annual inflation rate in December 2008 was 0.1%.

    I recommended TIPS in funds in BOTH my newsletters for all of 2009.

    Vanguard's TIPS fund, VIPSX, gained 10.9% in 2009 while its total bond fund, VBMFX, only gained 5.9%. Vanguard's GNMA fund many love, VFIIX, only gained5.3%. Vanguard's long-term bond index gained 1.9%

    Annual inflation rate in December 2009 was 2.7%.

    For more answers, read The Bond Book: Everything Investors Need to Know About Treasuries, Municipals, GNMAs, Corporates, Zeros, Bond Funds, Money Market Funds, and More Pg 102 "Inflation-indexed securities" and the links in my next article Part 4: TIPS and TIPS Funds or call Vanguard or Fidelity and have them explain it to you more before you buy their products.



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