Don't Miss Out On Great Gains! - Best Investment Newsletter

Don't miss out! Subscribe Now

Search For More

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:


Kirk Lindstrom's Investment Letter Performance

Followers (New)