Yesterday, the Federal Reserve purchased $7.5 billion of debt in the form of Treasuries from the government, and plans to continue buying debt for a long time to finance the government’s spending. As the government continues selling this debt, the money supply increases. In total, the Treasury may add $3 to $4 trillion dollars to the economy.
This inflation will eventually lead to higher prices and the devaluation of the dollar. While inflation isn’t a worry when the economy is slow and consumers aren’t buying goods, it is likely that prices will start to rise when confidence in the market returns.
Currently, those high-yield savings accounts won’t do much to protect investors against rising prices. The banks will be slow to raise their interest rates when the economy returns. Investors may want to take a look at their portfolios to add a hedge against inflation.
Usually, gold is considered one of the best options and the best way to add gold to your portfolio is through an exchange-traded fund like SPDR Gold Shares. Even though the value of money was once based on gold, there’s nothing inherently stable about the price of gold. Gold doesn’t have intrinsic value — nothing has intrinsic value. Value is only assigned to something when people want it. And there’s no reason that people need gold.
Nevertheless, people turn to gold when they’re concerned about the value of paper money, so that makes it a good hedge against inflation.
Treasury Inflation Protected Securities (TIPS) are bonds tied to changes in the Consumer Price Index (CPI), the government’s measurement of the rise in prices. TIPS will decrease in value if we experience deflation, but you are guaranteed to get out at least what you invest. You can buy TIPS directly from the government via TreasuryDirect.
There’s a problem with TIPS, however. The CPI figure that drives the value of the bond may not reflect the real price increases experienced by consumers. It’s likely you will still lose the purchasing power of your money while it is invested in TIPS.
Another option for hedging inflation is investing in commodities, particularly oil. If you invest in oil through an ETF, like Energy Select Sector SPDR, you reduce your exposure to any one company and mitigate some risk. Oil is suggested for hedging against inflation while the economy is low because as the economy recovers, demand for energy will increase.
Published or updated March 26, 2009.