Disclosure: We are reader-supported. If you buy through links on our site, we may earn a commission. Learn more.
After decades of tame price growth, red-hot inflation is back with a vengeance. Thanks to a unique combination of factors, people’s pocketbooks are losing purchasing power and once again suffering from surging prices. 2022’s investor playbook features some timeless wisdom for dealing with inflation, as well as a recognition that this year’s challenges won’t exactly mirror the inflation crises of old, such as during the 1970s.
While we can apply lessons from previous inflationary periods to the current economy, some of today’s challenges, particularly in the US financial system, are unprecedented.
In this article, we’re going to cover some of the best strategies to position yourself for what could be a very volatile near-term future, both for prices and the general economy. In order to know where we’re going, and how to prepare, it’s important to first understand the combination of factors, brewing since before the pandemic, that brought us to this point.
Request Your Free Investor Kit:
Protect your 401(k) or IRA against inflation with physical gold & silver.
Record-Breaking Inflation: How We Got Here
2021 began with a powerful sense of economic optimism. As the world emerged from the malaise of 2020, defined by pandemic fears, lockdowns, and a repressed economy, the forecast was finally for clearer skies. In some ways, this prediction came true. Economic activity, particularly consumer demand, certainly rebounded last year, and COVID certainly lost some of its power over our daily lives.
However, a combination of super-loose fiscal and monetary policy, as well as supply chains struggling to bounce back, has led to surging prices. As a result, 2021 ended with much more tempered optimism than it began, and inflation surging to highs not seen in nearly forty years.
While 2020 did not see high inflation due to reduced demand across the economy, governments around the world planted the seeds for today’s inflation, both in 2020 and for years before. It is hardly surprising that we’re seeing soaring prices today.
Demand rebounded sharply from the dog days of lockdowns and virtual living, and supply chains are readjusting toward smaller, more predictable networks. Of course, it doesn’t help that we had the highest federal budget deficits since World War II in both 2020 and 2021.
Federal Deficits: Increasingly Out of Control
On top of decades of growing trade and budget deficits, the United States spent inordinate sums of money, all of it borrowed or printed, to help get us through the pandemic. Economists are decidedly mixed in their opinions of how things will play out, but a weaker dollar in the long run is a strong consensus.
This strange period of low interest rates, huge twin deficits, and low inflation appears to be coming to an end. The time has come to pay the piper, and we can expect inflation to stick around for a while.
2022 is off to a rockier start than last year, and investors are rightfully worried about how to protect themselves from a combination of economic risks and headwinds. The most salient of these concerns is inflation as the dollar loses its purchasing power.
Unfortunately, runaway inflation could trigger some serious pain for the American economy, which has come to depend on a cocktail of low rates, easy credit, and low prices to keep chugging along. The key to a secure financial future is to prepare for that party to end.
How to Hedge Against Inflation
In this article, we lay out a number of popular hedging strategies. A well-diversified portfolio can protect you from whatever tomorrow brings, including a heavy hit to the dollar. Here are some popular strategies we’ll cover:
- Foreign Investment as an inflation hedge
- Precious metals
- Real Estate as an inflation hedge
- Purchasing government debt, particularly TIPS and short-term debt
- Buying Stocks
- Buying Cryptocurrency as inflation rises
Request Your Free Investor Kit:
Protect your 401(k) or IRA against inflation with physical gold & silver.
Although we’ve certainly felt it at home, recent inflation is not a uniquely American phenomenon. High inflation is surprising markets around the world, from Europe to Latin America. Even Japan, the notoriously uninflatable economy, has recently seen prices shoot up. However, investing in foreign assets can offer you an accessible way to get some of your eggs out of the American basket. While all economies will likely struggle in some way, the American economy could prove particularly vulnerable to massive inflation, since it depends so deeply on a strong dollar to continue supporting massive trade and federal budget deficits.
Many assets, from equities to real estate, are also much less expensive abroad than in the United States, offering an attractive entry point while the dollar is still so strong against other currencies. Price to earnings ratios in developing markets are a bargain compared to the S&P 500, and high-end homes can be purchased for a fraction of what they would cost in the United States.
While investing abroad can protect you from dollar-specific risks, remember that the pressures of rising inflation are likely to ripple throughout the global economy. There are additional risks to investing abroad, particularly if you have a short time horizon. These include changes in the exchange rate between your usual currency and the currency in your target country, as well as the potential for major changes in the country, such as new policies or an economic crisis, to leave foreign investors out in the cold.
Gold & Silver: A Tried and True Hedge
Gold and other precious metals offer an obvious and enduring hedge against the devaluation of government currencies, particularly now that major currencies aren’t backed by any hard assets. Gold has appreciated 45% against the dollar since 2016.
Gold offers a secure store of value, with built-in demand during times of great economic uncertainty, as we’re seeing today. More broadly, all precious metals see increased demand during periods of inflation and economic worries.
There are several ways to invest in gold and hedge against inflation. You can purchase gold ETFs (exchange-traded funds) through your brokerage, although this does not provide the additional security of actually owning the physical asset. A longer-term, more secure strategy is to purchase physical gold. There are a number of ways to store your wealth in this precious metal, including rolling over retirement funds into a precious metals IRA.
While gold and inflation do not move perfectly in line with one another in the short term, gold is a tried and true insurance policy against inflation in the long run. Consider adding gold to your portfolio to provide peace of mind, greater diversification, and a strong store of value no matter what the future brings.
Related: How to protect your 401(k) from inflation with physical gold and silver.
Commodities: Pain at the Pump, Pleasure in the Payout
More generally, commodities including gold, oil and agricultural products are a strong hedge against rising prices, particularly when driven by rising input costs like we’re seeing today. Though still likely to continue rising in 2022, the CRB Commodities Index is up about 75% since the start of 2021.
A jump in the price of commodities was expected immediately after the pandemic, as demand for inputs rebounded with the broader economy. However, a number of factors should continue to support high commodity prices in the future, including the major disruption to energy supplies caused by Russia’s war in Ukraine, as well as the falling buying power of the US dollar.
Investing in commodities offers not only a hedge against general inflation, but particularly in the direct impact of rising commodity prices on your everyday life. Paying over $4 a gallon for gas may sting a bit less if you know your portfolio has some exposure to surging energy costs.
The same is true for groceries, as agricultural commodities will likely continue rise in 2022 as well, driven by supply chains and food security concerns across the globe.
Investing in commodities provides a solid hedge against inflation, but also can entail greater volatility than precious metals. Commodity prices can fluctuate dramatically, and are subject to intense competition between countries to influence price and control supply. Inflation, especially stagflation[PM4] , does not always involve rising commodity prices, as demand for commodities could fall with broader economic activity during a recession.
Request Your Free Gold Investor Kit:
Protect your 401(k) or IRA against inflation with physical precious metals.
Investing in the Stock Market
Stocks are an extremely popular place for investment. Since the Great Recession and subsequent monetary policy of near-zero interest rates, this has proved even truer. Blue-chip companies and broad indices have generally offered high yield and low volatility since the crash in 2008. Even during the pandemic, Congress and the Federal Reserve made sure to keep the stock and property markets from falling. Incredibly, the market for both was higher by the end of the year.
This party may end if the federal reserve cannot tame inflation, but the stock market still offers the chance for dividend income and capital appreciation. A well-diversified equity portfolio can empower your financial future as an inflation hedge, especially in the long run.
In recent years, growth stocks like Facebook and Amazon have far outperformed value stocks, which see slower earnings growth but are less expensive to purchase. This paradigm could flip in tougher economic times.
As rates rise with inflation, borrowing will become more expensive, and capital could generally become harder to access. High-growth companies depend on borrowing and issuing new stock to finance that growth, so they could suffer in this environment compared to more stable, self-sufficient firms like JP Morgan or Exxon-Mobil.
In fact, financial and commodity stocks are well-positioned to provide a hedge against inflation in 2022, even to benefit from it. Both interest rates and commodity prices are likely to keep rising this year, particularly if the conditions for high inflation remain.
A word of caution: equities are very highly valued right now, near all-time highs in terms of the market’s price-earnings ratio. Much of this value is indirectly due to very low interest rates. Economists have demonstrated that the stock market now reacts violently to even the prospect of the Federal Reserve rising rates. Big rate hikes in response to inflation could hit you twice, in terms of falling stock prices and a falling dollar.
How to hedge against inflation? Ultimate Guide
Real Estate as an Inflation Hedge
Buying property is a classic way to stay ahead of inflation. A number of factors make real estate an attractive way to protect your wealth from rising prices. It is a tangible asset, which at the very least will provide rental income or a place to live in lean times.
Real estate also offers the option of a fixed-price mortgage. Mortgage rates are starting to rise, but could still look trivial compared to future inflation, causing your real interest rate on the mortgage to be negative over time, as well as shrinking your real monthly payment.
If purchasing real estate is not on your radar, a Real Estate Investment Trust (REIT) could be more accessible. REITs, many of them publicly traded, are companies that own income-producing real estate. They tend to comfortably outperform inflation.
One thing to keep in mind: like the equity markets, the real estate market could be vulnerable to a major crash if interest rates climb too high. Much of the market’s high valuations today is the result of over a decade of ultra-low interest rates.
Lending to Uncle Sam during high inflation, when confidence in the government’s IOUs are on the way down, may feel like letting Peter rob you to pay Paul. However, certain treasuries can offer yields which partially shield you from inflation. This is particularly true of shorter-term treasuries and TIPS (Treasury Inflation-Protected Securities).
Short-term government debt, such as the one-year or two-year treasury bills, is very sensitive to inflation as well as rate hikes from the federal reserve. They mature quickly, which means you aren’t locked into a fixed yield if inflation continues to heat up.
Treasury Inflation-Protected Securities, or TIPS, offer more explicit protection as a hedge against inflation. TIPS offer a fixed yield, but will periodically adjust the face value of the bond according to the inflation rate. When the bond matures, you’ll receive the principle, adjusted for inflation.
While government debt can partially shield you from inflation, they don’t offer much yield beyond that, and they are still tied to the same government whose decisions created inflation in the first place. This makes them an attractive hedge for their perceived security, but potentially subject to the same weaknesses as the dollar itself.
CryptoCurrency: Interesting Inflation Hedge, Risky Investment
Everyone with even a casual interest in finance has heard of cryptocurrency by now, likely by its most famous example, Bitcoin. Bitcoin and other cryptocurrencies have soared in value since their inception a little over ten years ago, with Bitcoin’s valuation increasing from less than a dollar in 2009 to over $40,000 at the time of this writing. The journey has been extremely volatile, however, and trying to predict the regulatory outlook as well as its real fundamental value is a difficult task.
Bitcoin’s meteoric rise: safe harbor or pure hype?
This is the first time that cryptocurrency, proclaimed by supporters as a more stable alternative to traditional currencies, has existed as a viable asset class during a time of high inflation. The market capitalization for a majority of cryptocurrencies, including Bitcoin, has mostly come from people speculating on future appreciation, not from its proven use value.
With the flow of cash potentially tightening due to changing federal government policy, slower economic growth, and rising inflation, this year will prove an important test of whether Bitcoin truly is a hedge against inflation or simply falls along with sinking investor confidence.
Are these digital alternative investments a smart inflation hedge? Depending on your risk tolerance and time horizon, it warrants interest as a hedge against choppy waters or a high-yield speculative play.
Related: What is a Cryptocurrency IRA? How to Diversify Your 401(k) with Bitcoin (Tax-Free)
Request Your Free Crypto IRA Investor Guide:
Protect your 401(k) or IRA against inflation with cryptocurrencies like bitcoin and ethereum.
Stay Calm, Be Patient, Diversify
These three simple pieces of advice will help you sail safely through many storms, economic or otherwise. We are certainly in uncharted waters, particularly when it comes to the future of the US dollar.
Inflation is surging at a time when our debt is eclipsing GDP and the political will to cut deficits remains low. Geopolitical instability is threatening supply chains, especially the cost of energy. We simply don’t know how an economy built on cheap imports, low rates and high demand for US debt would react to a much weaker dollar.
While these factors should not scare you, they should help to inform how you prepare for the future. Assuming that low interest rates, low inflation, and steady yields on risky assets will continue forever, puts you in a dangerous position. It’s time to strategize for a rockier economic landscape.
The key to preparing for tomorrow is to diversify your holdings, and to carefully consider how inflation is likely to impact investment performance. All of the options we described above are viable way to help hedge against inflation, and we recommend some mixture of all of them to truly protect yourself. While each has its advantages, only precious metals, when physically held, give you a portable, powerful store of value.
In this age of digitized finance, ownership of our assets feels more fragile than ever. A small allocation of your portfolio to a hard asset, which can be physically stored, spent and accessed, is a powerful hedge against an uncertain future.
If you're considering investing in gold or silver, request a free informational kit from our recommended gold company below.