An Easy Inflation Hedge

The best way to hedge against inflation is to buy "stuff".  You wouldn't want to buy bonds or an annuity, as you will get paid back in depreciated dollars.  When you buy stock, you are buying a very small piece of ownership in a company.  Some of this represents buildings and other equipment that the company may own.  But buying stocks is certainly not a very good way to hedge against inflation.  In an inflationary environment, the economy may be in very poor condition and, hence, company profits also do poor.

Gold is still one of the best hedges against inflation.  In a mild inflationary environment, gold may not do all that great.  But if price inflation starts going at 10% per year or higher, gold will likely do well.  Not only will it keep up with the price increases, it will probably go up much higher in real terms.  If prices start going up at a 20% annual rate, you could easily see gold going up at 50% or 100% per year.  That is what makes it a great hedge.  You can have just 25% of your portfolio in gold and it will protect your entire portfolio from inflation as demonstrated in the above example.

There is also another way to hedge against inflation, and you may already do this a little bit.  It is not nearly as good as buying gold and it should not replace buying gold, but it is easy.  If you have some extra space where you live, you can buy things that you know you will use in the future.  Perhaps you are going to need a new appliance of some sort.  Maybe it is better to get it now before prices go up.

There are many bad things that Federal Reserve inflation causes.  It allows for big government politicians to spend more.  It causes boom and bust cycles.  The obvious bad thing is that it causes prices to rise.  You can buy things now instead of later when the price goes up.  This goes even for small things.

You obviously can't buy milk right now that you are going to use next year, but there are a lot of things that don't have near-term expiration dates.  You can buy toilet paper, razor blades, canned soup, soda, paper towels, soap, laundry detergent, etc.  All you need is a little extra space to store it.  If you see a good sale at the store, why not buy a few extra things if you have a little extra cash laying around?  Just make sure you use the FIFO method of accounting (first in, first out).  In other words, use the older stuff first.

Again, this isn't to replace gold or anything else as an investment hedge.  But it could save you a few depreciated dollars in the future.  If you knew that dishwashing soap would cost 8 dollars next year and you can buy it for 3 dollars this year, why wouldn't you buy a few extra now, especially if you have the money to buy now?