I agree, TrendFader. Any commodity, such as gold has two components of price movement: "real" price movement and inflation-based price movement. Any commodity that has significant real price movement is not a good hedge for inflation. Thank you for suggesting TIPS, any other safe ways to hedge inflation?
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stupid question
- Thread starter sunnyskies
- Start date
Quote from sunnyskies:
OK, what if I live "globally", citizen of the world or whatever.
Then you definitely have to hedge your portfolio. If you are investing in country with a different currency you can use forwards to protect your future profits. If you don't have a home base and are uncertain where in the world you are going to wind up or you are a perpetual traveler then your best bet is to decide for yourself what you think the reserve currency of the future is going to be and hedge other currency investments against this currency.
Quote from sunnyskies:
I agree, TrendFader. Any commodity, such as gold has two components of price movement: "real" price movement and inflation-based price movement. Any commodity that has significant real price movement is not a good hedge for inflation. Thank you for suggesting TIPS, any other safe ways to hedge inflation?
There is no full proof plan.. and I am not crazy about TIPS.. because I dont believe the CPI accurately indicates inflation. But its a very decent start.
The old saying is that stocks are the ultimate hedge against inflation and historically and academically buying the S&P over the course of decades would of hedged you and then some. But I strongly belive that will no longer be the case.
In my opinion the best way to hedge against inflation is to own TIP bonds, perhaps a few munis, and whenever gold sellsoff( like right now) scale net around %10-15 ( or even more) of assets and accumulate a position.
--MIKE
Quote from TRADERguy:
Then you definitely have to hedge your portfolio. If you are investing in country with a different currency you can use forwards to protect your future profits. If you don't have a home base and are uncertain where in the world you are going to wind up or you are a perpetual traveler then your best bet is to decide for yourself what you think the reserve currency of the future is going to be and hedge other currency investments against this currency.
That is incorrect. If dollars fall, gold rises. Your best bet to hedge yourself against depreciation of currencies is to own commodities.
Since gold is priced in dollar the fact that you are 50% hedged (if that hedge were even possible) you wouldn't have to worry about dollar depreciation. If dollars become less expensive, the rest of the world pays less for gold and hence gold rises.
Again, you do not need to worry about exchange risk.
Quote from Trend Fader:
The truth is that GOLD is not a perfect inflation hedge. Because much of the movement of gold is based on non inflationary issues... such as speculation and demand for metals.
A better hedge on inflation are TIPS.. which are inflation protected bonds.. I believe they give u 100 basis points plus inflation.
--MIKE
Excuse my inexperience, but what are the reasons that make you believe that TIPS price is not affected by speculation ? couldn't interaction of demand and supply distort greatly its value ?
swoop, I humbly believe you are mistaken:
Like was pointed out before commodities have significant fluctuations in their own right and thus do not make a good hedge against inflation. For example, lets say gold is at $300 in 1980. In 1990 it's at $150. The market forces in the gold market have brought the price down. While, if inflation was the determining factor the price could only increase and would increase say to $350. You were trying to hedge against inflation - instead you ended up losing a significant share of your principal. I hope this makes sense.
Like was pointed out before commodities have significant fluctuations in their own right and thus do not make a good hedge against inflation. For example, lets say gold is at $300 in 1980. In 1990 it's at $150. The market forces in the gold market have brought the price down. While, if inflation was the determining factor the price could only increase and would increase say to $350. You were trying to hedge against inflation - instead you ended up losing a significant share of your principal. I hope this makes sense.
I dont think there's "market risk" in TIPS. The return is fixed at a certain rate + inflation.
The only two problems that I see with TIPS are (as mentioned by others before):
1) Tax implications are not attractive
2) The inflation index used by the govt. to adjust for inflation does not describe real inflation perfectly.
The only two problems that I see with TIPS are (as mentioned by others before):
1) Tax implications are not attractive
2) The inflation index used by the govt. to adjust for inflation does not describe real inflation perfectly.
Quote from sunnyskies:
swoop, I humbly believe you are mistaken:
Like was pointed out before commodities have significant fluctuations in their own right and thus do not make a good hedge against inflation. For example, lets say gold is at $300 in 1980. In 1990 it's at $150. The market forces in the gold market have brought the price down. While, if inflation was the determining factor the price could only increase and would increase say to $350. You were trying to hedge against inflation - instead you ended up losing a significant share of your principal. I hope this makes sense.
Reread my comments. It was not vs inflation but vs exchange rates. I was just saying that owning commodities is a way to hedge against currency risks. Owning gold is just like owning swiss francs in a way.
"So you think that if the dollar takes a 30% hit against other currencies but I live in US and earn rates that beat inflation.... that shouldnt bother me? Hmm, interesting viewpoint."
"Yes, if you live in a USD universe and everything that you are ever going to spend money on is priced in US Dollars then you do not have to hedge against dollar depreciation."
Don't agree: surely the cost of imports can rise, which in themselves are part of inflation, dollar is purchasing less, ie gas.
Gold as hedge against inflation is part of the gold bugs mythology and speculative.
What about some sort of mortgage bond, or would that be a poor idea if the housing bubble bursts and sales and prices decline ?
Provided one's accurate about the direction of the dollar, for a relatively small amount of capital one could hedge one's dollar exposure with futures contracts or forex currency pairs, 'overhedgeing' to produce a profit to counter inflation.
"Yes, if you live in a USD universe and everything that you are ever going to spend money on is priced in US Dollars then you do not have to hedge against dollar depreciation."
Don't agree: surely the cost of imports can rise, which in themselves are part of inflation, dollar is purchasing less, ie gas.
Gold as hedge against inflation is part of the gold bugs mythology and speculative.
What about some sort of mortgage bond, or would that be a poor idea if the housing bubble bursts and sales and prices decline ?
Provided one's accurate about the direction of the dollar, for a relatively small amount of capital one could hedge one's dollar exposure with futures contracts or forex currency pairs, 'overhedgeing' to produce a profit to counter inflation.