What Is The Best Way To Protect Yourself From Inflation?

Factual Questions
61

I substantially increased my gold holdings when bush got elected, and then added a little more when obama got elected. What you are saying, an expectation of inflation, has a big influence in why people who want to retain some wealth, buy and hold gold.

The purpose of owning gold is not to make money, but rather, to “retain” wealth, as a store of value, esp in times when governments are irresponsible, when there is danger such as wars, or other great uncertainty.

However, “if” you were to start balancing the federal budget and turn it into consistent surpluses, change our balance of trade deficits into surpluses, and then start substantially paying off the federal debt, then, and only then, I will reduce my gold holdings.

Frankly, unless things in this country turn around, I dont think the US dollar, nor the US economy, nor dollar dependent assets, will do very well with continuing multi-trillion dollar annual deficits adding to our 100 trillion dollar debt.

62

I think you have mentally already done the 10x devaluation you talked about earlier. The debt is $14 trillion and currently increasing by a little over one trillion per year.

63

Only just had time to read the link. It is quite an interesting article (please do not assume that you will know what I think).

As has already been pointed out, TIPS use CPI-U (NSA), which means that several of the author’s objections to CPI calculations do not apply.

I also disagree with him on some others. For example, he objects to adjusting the calculations to take into account quality improvements such as adding anti-lock disc brakes to a car as standard. He objects that all of the resulting price increase is not included in the CPI calculation. To my mind that is reasonable - a better comparison for CPI purposes would be to compare the new price with the previous cost of the car plus the cost of the brake option and the CPI calculations are taking this into account.

And he objects to the rising house prices not being properly reflected (this was written in 2005). Is he now complaining that CPI is stated as being too high because it does not properly reflect falling house prices?

Mind you, to be fair he does forecast (in 2005) substantial upcoming problems in the US economy caused by house prices and mortgages, with recession and possibly depression.

Personally, my inflation protection comes in the form of buying TIPS (which was why I was interested in hearing the arguments for a misstated CPI) and making sure my bond funds are short and medium term.

64

Gold is nice as part of a poftfolio, and it can be good to hold as part of an inflation hedge, too.

But if you are expecting a lot of inflation, the appropriate resonse is LEVERAGE.

With inflation, barring a stagflation event, stocks prices tend to perform well. The reaosn for this is simple. Since, 1 dollar is now worht less than it was before, the company now needs to earn more dollars to provide the same value. And all of the goods that it is selling are now selling for more nominal dollars, etc. So, the price of a share of the company goes up, just like the price of everything else goes up. So, if you owned the company prior to the inflationary period beginning, then you earn solid returns. (obviously, not every stock wins, so you want to stay diversified - feel free to include a gold etf in there if you like).

But the trick with inflation, is that this returns may be high compared to previous returns, but they’re really not that impressive because everything costs more now - so you’re doing better nominally, but your real earnings haven’t increased.

This is where leverage kicks in. You lever the crap out of your investment. Acquire as much debt as you can prior to inflation. Then you take that monery and invest it. Assume inflation comes in at, say, 10% - and prior to the beginning of the inflationary period you were borrowing at 4% and you’ve levered up 4 to 1. That means you took $100 of your own money and borrowed $400. Let’s say your stocvk investments only return 14% (4% over inflation isn’t very good at all).

That means you make $70 interest, but you have to pay $4 in interst of your debt. So, a profit of $66 on an investment of $100, that’s a 66% return, which isn’t bad. Of course, in the following year, you are less levered, with $166 of your own money and $400 of someone else’s, so your return will decrease, but it will still be pretty good.

Anyway, borrowing is how you deal with inflation - in terms of investment classes, it still makes sense to be diversified - any asset can tank and the market doesn’t reward idiosyncratic risk. But you would want to stay away from bonds, with the exception of TIPS or convertible securities.

65

It’s the red line in the chart I linked here.

In 1970, the price of gold (adjusted for inflation) was $200.
Today it’s $1350 (adjusted for inflation).

The more important point to me is that gold is a hedge against crazy inflation, in my opinion. The kind of inflation that occurs when currencies crap out. Despite that not having been the case, gold has multiplied almost 7 times even when inflation is factored in, and all that time would have still performed its primary role of being a hedge against really really bad inflation.

I must say I do not understand the argument above (Ludovic) about how only those with enormous positions in gold would benefit if inflation soared because everyone else would only see a benefit relative to the (small) absolute amount they had in gold as an investment. That argument could be applied to any individual piece of a balanced portfolio.

This would be a fun thread to revisit in 5 and again, 10, years.

66

I don’t think anyone is arguing against holding gold, what concerned me is some people (especially Susanann) were saying things about gold like it is magical and as long as you own a lot of gold nothing will ever go wrong. It looks like they have at least conceded you need a balanced portfolio so I don’t really have any further objections to gold holding.

I also think most people should think about investments in terms of essentially a middle class person trying to squirrel up enough money over ~30-35 years to retire happily for 20 years. That’s the situation most people are in, and realistically most of those people won’t own individual stocks but rather will be invested in various funds, have some bond holdings, and those people might benefit a bit from diversifying their portfolio to include some gold (or a gold ETF, although those have their problems versus gold–but gold can be annoyingly problematic to buy and store itself.)

I wanted to make it clear you couldn’t just have a lot of gold and happily retire, that’s why I picked an absolute worst case scenario for describing the possible pitfalls of gold. In my example I wasn’t screwed because my gold had lost value, I was screwed because I had been planning on it being much more valuable 20 years later, such that I could retire on the profits I’d make selling it.

Even if you can live in retirement for 50% of what you lived on while working, that still means you’ll need to put away like half your earnings every single year for 35 years if you want to be able to live for 15-20 as a retired person if you invest in something that essentially doesn’t grow wealth. You need exposure to investments that grow year to year because if your money isn’t growing above and beyond what you’re putting away, you probably won’t have enough to retire.

67

  1. I never said that. It is the other people who believe in magic. It is other people who believe that the United States can borrow hundreds of trillions of dollars without collapsing the US dollar AND the US economy. People who believe that they can borrow and spend endlessly are the ones who believe in fairy tales.

  2. Gold does not increase in value, nor increase wealth. Gold is gold. Gold is a constant. Gold is what everything else is compared to. Gold maintains its value no matter what governments come and go. If you were counting on gold to be more valuable, then you dont know what you are doing. The purpose of gold is to maintain your wealth, so you dont lose it. When all paper money becomes worthless, when savings accounts, CD’s, and bonds become worthless, and when the US and world economies have collapsed drowning in their debt, those who own gold will have saved their wealth and will not go hungry.

  3. Normally, gold should only be a small percentage of ones wealth. However, if world economies and world currencies are about to go bust, the proportion of gold everyone holds should be more significant. The current unusual times are why gold today must be bought, accumulated, and held. 50, 100 years ago, America was a stable country and we didnt need to hold onto so much gold. I drastically increased my gold holdings after bush and obama got elected .

68

Where do you get this “hundreds of trillions” from? The current debt is fourteen trillion (still pretty appalling, but let’s not grossly overstate it).

69

I am. It may well be in a bubble, well above normal prices. Buy high, sell low is something I try to avoid.

70

I hope you can see that one of these statements must be false…

71

Quoth Susanann:

And how, pray tell, do you propose we accomplish that? If everyone is buying gold, whom are they buying from? Are we supposed to go out and mine the asteroid belt, or something?
Quoth amarone:

You, me, and Jesus Christ. Even if we weren’t in a bubble, I wouldn’t put anything into gold, because investing is better than just sitting on assets.

72

Not necessarily. It depends what you do with the money.

As a case in point, I myself just mortgaged my house to the hilt about 5 weeks ago, and put all the money in high-yielding energy stocks. The idea is that the dividends pay the mortgage costs (the portfolio yield is a bit over 6%). So far so good (it’s up over 10% since then).

Of course, there’s risk in everything you do. These companies can all go bankrupt. But if they don’t it’s a great deal, because inflation helps me out, and even if there’s no inflation, the mortgage is being steadily amortized, while the value of the stock holds steady or even increases.

73

The best hedge against inflation is durable goods with value. Buying or refinancing a home locks in a low price on something you can live in. Once it’s paid off, you live in it at relatively low cost; if you find property taxes onerous, you can rent out a room. For businesses, the sort of thing I’m thinking of is either capital equipment or stock in trade (if you own sufficient warehouse space).

Right now, I wouldn’t go that route; hedging against inflation is premature when there isn’t any. You just get stuck with your assets tied up, paying interest on loans, paying taxes on property, and watching equipment depreciate with no income to make it worthwhile.

74

Originally Posted by Susanann
In 1929 the Dow peaked out at 19 ounces of gold (Dow 381/$20 an ounce of gold). Today, in 2010, the Dow has still not come back to its 1929 peak value, and the Dow in 2010 is now currently worth only 8 ounces of gold (Dow11118/$1360 an ounce of gold) which is less than half of what it was worth 80 years ago.
Quote:
Originally Posted by Susanann
On the other hand, an ounce of gold from 1929, has the same purchasing power today as it did back in 1929.

Nope!

They are both true statements.

Moreover, there are several people predicting that in the near future, the price of the Dow will further come down (…or the price of gold go up) to equal the price of “1” ounce of gold. Meanwhile the purchasing power of gold will remain constant as it has for hundreds, for thousands or years.

75

Quoth Susanann:
However, if world economies and world currencies are about to go bust, the proportion of gold everyone holds should be more significant.

Well, obviously “everyone” should own gold, but everyone is not going to own gold. Only the smart people, the wise people, the people who can see the folly of excessive debt and the disaster coming our way, will actually own gold in a substantial.

76

Originally Posted by Susanann

  1. I never said that. It is the other people who believe in magic. It is other people who believe that the United States can borrow hundreds of trillions of dollars without collapsing the US dollar AND the US economy.

The federal debt, if you include unfunded liabitilities is now over 100 trillion dollars.

Besides, the last time I checked, the federal budget is NOT balanced, and our federal debt is STILL INCREASING at an increasing rate.

77

That’s a good point. Gold isn’t a productive asset. It’s purely defensive. The only way you make money buying gold is to count on appreciation in the price.

I love it when people who have absolutely no training in economics let alone monetary theory come on to boards like this and act as if they have the faintest clue as to what is going on. They talk as if the people running the fed are complete morons or worse, in some evil cabal with god knows who trying to engineer the destruction of our society. Honestly, if I have to put my faith in someone like Bernanke or some anonymous poster who claims to have all of the answers, it’s not much of a choice.

78

Do these “several people” all live in cabins in Montana?

I have just set a reminder to check the Dow and gold prices in one year and then revisit this thread. I will bet you that the S&P 500 (currently 1,193) will pass the price of one ounce of gold before gold gets anywhere near the Dow.

79

Originally Posted by Susanann
Moreover, there are several people predicting that in the near future, the price of the Dow will further come down (…or the price of gold go up) to equal the price of “1” ounce of gold.

The people who are saying it, are among the wealthiest people in the country - people who know money, who know economics, and who know what out of control governments can do. Poor stupid people who have no clue, do not own gold.

I did not say the Dow will be equal to the price of 1 ounce of gold in 365 days. I dont know “when” it is going to happen, I just know that it IS!!! going to happen as long as we continue to have trillion dollar deficits, as long as we continue to overpopulate via record immigration, and as long as we continue to move our jobs to china.

One has to have** zero **understanding of economics to believe that continued endless trillion dollar deficits are not going to destroy our economy and destroy our dollar.

Only a fool thinks he can endlessly borrow more and more and get away with it.

80

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