The five best investments during inflationary times
The price of gold increases when there’s inflation in the economy. Gold is a haven investment because it protects against inflationary pressures.
Gold bullion bars (one-ounce ingots) and coins are highly liquid investments. They’re also portable, so you can take them with you if you need to leave the country in a hurry.
Indeed, central banks across the globe hold large reserves of gold bullion as part of their foreign currency reserves portfolio.
For example, you can buy gold through an exchange-traded fund or store physical bullion at home or in a safety deposit box at your bank. However, this isn’t without risk – as with any precious metal stored at home, there’s always a chance it could be stolen, so insurance cover is essential to protect your investment from theft and other risks such as fire damage.
One way to mitigate these risks is by buying allocated (segregated) storage where each bar or coin has its serial number and certificate of authenticity detailing weight and purity. This option gives investors much greater peace of mind that their precious metals are being stored safely off-site away from prying eyes.
In addition, the London Bullion Market Association sets the daily spot price for gold trading worldwide (the LBMA price). This serves as an international reference point for pricing contracts worldwide, including central banks and refiners, who trade large quantities daily – typically millions of dollars’ worth per transaction.
Overall demand for gold tends to increase when paper money becomes worthless due to high inflation rates. For example, in Zimbabwe in 2008, hyperinflation reached 500 billion per cent per month, resulting in people carrying wheelbarrows full of cash just to buy basic groceries. A single US dollar note would cost several hundred million Zimbabwean dollars, making even small purchases prohibitively expensive before stores ultimately ran out, forcing people into barter systems where goods were exchanged instead, such as one chicken for two loaves of bread.
2. Hedged equity funds
A hedged equity mutual fund employs various hedging techniques insulating investors somewhat from stock market volatility caused by rising interest rates during inflationary periods.
For instance, higher interest rates usually lead to lower stock prices because they make borrowing more expensive. This slows down economic growth while simultaneously increasing costs associated with holding inventory (costs go up faster than revenue).
Hedge funds employ various strategies designed to mitigate some downside risk while still providing upside potential. This includes, but is not limited to, short-selling stocks they believe will fall in value along with using derivatives.
These include call options where they gain exposure or ownership rights over underlying assets like stocks without actually having any ownership stake. This limits the downside loss potential while still benefiting should share prices rise as expected.
Hedged equity funds offer protection against unforeseen events should share prices unexpectedly fall instead, resulting in losses on their short positions.
These aren’t covered by gains made on corresponding long positions elsewhere within the same portfolio. This means that overall losses could potentially be incurred despite initially being profitable had everything gone according to plan.
Some hedge funds use leverage. This affords managers greater flexibility when executing trades. However, this comes hand-in-hand with increased risk compared to non-leveraged vehicles.
Recall that debt creates additional risks beyond those inherent within equity securities, thus adding another layer of complexity into already complex portfolios.
Leverage amplifies both gains and losses, so it pays dividends knowing how this strategy works before getting involved. Remember that traders and investors could potentially incur heavy losses quite easily otherwise.