An inflation hedge is an investment intended to protect the investor against (hedge) a decrease in the purchasing power of money (inflation). A number of assets are traditionally considered good hedges against inflation. As global inflation in general trends up; a common question among investors is “How to hedge against inflation?”
Breaking down inflation hedge: An inflation hedge is an investment that is considered to provide protection against the decreased purchasing power of a currency that result from the loss of its value due to rising prices (inflation). It typically involves investing in an asset that is expected to maintain or increase its value over a specified period of time. Alternatively, the hedge could involve taking a higher position in assets, which may decrease in value less rapidly than the value of the currency.
What is a good hedge against inflation? First let us discuss the traditional ways to hedge inflation which includes: Gold, Silver, Commodities and Real estate.
Commodities: The prices of commodities like grain, precious metals, electricity, oil, beef, orange juice, and natural gas easily picks up and move in tandem with market prevailing inflation; which implies the prices of commodities quickly adjust to the inflation and thus could be considered as good hedge against inflation. Holding commodities involves storage costs which could be deterrent to invest in commodities but it’s possible to broadly invest in commodities via ETFs.
Gold: Gold being a very rare and precious metal is costly and thus buying gold solves the problem of storage cost. Gold is considered to be a good hedge against inflation in long run as the prices of gold depends upon several other factors happening but in long run gold can be considered as a good bet to beat inflation.
Silver: Is Silver a good bet against inflation? Yes or No; well silver is also a good hedge against inflation as prices of silver picks up along with inflation and being less precious metal; an investor has to buy more. There is another problem with silver and that is it oxidizes which is not a problem with gold.
Real Estate: As house prices and rents typically increase during times of inflation; real estate is considered a hedge against inflation.
Treasury Inflations Protected Securities: Treasury Inflations Protected Securities (TIPS) are designed to increase in value in order to keep pace with inflation. The bonds are linked to the Consumer Price Index and their principal amount is reset according to changes in this index.
How to Hedge against Hyper-Inflation: Hyper-Inflation is a situation when inflation is no longer is under control. If an economy goes under hyper-inflation; people in general lose faith in paper money. Like recent cases of hyper-inflation in Zimbabwe (2004) and Venezuela (2018) where general public lose faith in currency; foreign currencies like Dollars/Euro, Gold and Real estate were a good hedge.
Summary: While GOLD, Silver and real estates are good hedge against inflation but TIPS are considered as the best bet to beat inflation as those securities are backed by government and considered to be safe.