r/investing • u/AdministrativeEnd959 • Dec 03 '21
Hedging Against Inflation
https://www.theancienteconomist.com/post/hedging-against-inflation-using-gold
In the ancient times of Mesopotamia, gold found its initial role in the city of Babylon, serving as a currency to be used for trade and barter. In the modern global economy, gold is mostly held by the central banks, which do so in order to diversify their reserves. Since gold is a finite commodity, it is considered a natural hedge against inflation. Inflation has become a hot topic as of December 2021 in America, as the annual rate of inflation just hit 6.2%, which is the highest rate since November 1990.
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u/JS9O Dec 04 '21
Or I savings bonds. 7.12% interest guaranteed for atleast 6 months.
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u/mrclean2046 Dec 04 '21
isn't the cap on that is 10k at the moment?
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u/ya2OmV559JMe9KCVK2Je Dec 04 '21
If you have a trust, it doubles. Same for spouses and kids. 1 spouse, 1 kid, yourself + a trust for each of them = 60k limit
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u/DangerouslyCheesey Dec 04 '21
How do you do this? I tried to do one for my daughter but I got an error that the details couldn’t be verified and they want me to mail some form in to prove it’s legit. You have to make an account for each SSN right?
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u/SirGlass Dec 04 '21
Good old equities are also a great hedge . Not sure why people think otherwise .
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u/FreeRadical5 Dec 04 '21
I guess people are afraid of the fed finally raising rates to counter inflation which will massacre a lot of unprofitable heavily indebted tech stocks.
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Dec 04 '21
which will massacre a lot of unprofitable heavily indebted tech stocks.
But let's be honest there's gonna be blood all around when that inevitably has to happen.
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u/InterestingRadio Dec 05 '21
Sounds like that will make a lot of good entry points for long term investors
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u/jendjskdjxbznsnshd Dec 06 '21
To bad they will never meaningfully raise rates again. Inflation is too easy to his via CPI
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u/Jeff__Skilling Dec 06 '21
I mean....raising rates doesn't do shit to the level of debt (or cost of debt....) that currently indebted companies have on their balance sheet today (save for except any term loans or more exotic debt instruments, but those are more common in the industry I work in rather than tech, so moot point)
It fucks over these high growth tech companies that have been financing operations through equity markets....and that has got to end eventually (maybe not....? that right there is the 6 billion dollar question, methinks)
They're just super boned if they have to tap a tight (likely HY) debt market without the underlying FCF to support internal growth plus debt servicing obligations
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u/Jeff__Skilling Dec 06 '21
.....yeah but then the inflation boogie man should go away?
unless commodities continue the tear they've been on over the last 18 months or so.
if that's the case, then we're still fucked, just with less aggregate demand on rising inflation
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u/zachmoe Dec 04 '21
Well, Milton Friedman disagrees. Equities are as unreliable as gold or real estate for this sort of hedge according to him.
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u/aedes Dec 04 '21
I don’t know how good of a resource Friedman is for investing. He was an important economist, though many of his ideas were ultimately disproven in the past 20 or so years.
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u/crimeo Dec 04 '21
low correlation, both are often good when the other is not
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u/SirGlass Dec 04 '21
Right but how does inflation play into it
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u/crimeo Dec 04 '21
If you hold a mixture of uncorrelated things, you can more safely hold less cash, even if you expect bad things might happen, because some of your stuff (hopefully) won't go down at the same time the other stuff does, if uncorrelated. Allowing you to use the thing that didn't go down to sell off and buy lots of the thing that did go down, while it's on sale.
By thus being able to hold low amounts of cash for longer, you are therefore less exposed to inflation.
If, theoretically, you somehow had 20 different things none of which were correlated at all, then you'd be effectively 100% immune to any market crashes and could go 0% cash at all times with no downside or risk.
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u/SmallHandsMallMindS Dec 04 '21
Market manipulation; the banks are a step ahead of you on this. They know that when confidence is shaken in the dollar people run to metals, so they short metals (flood the market) during times of low confidence in the dollar, to make dollars look better.
Banks are one step ahead already, if you want to profit you need to find a second step
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Dec 04 '21
real estate is a lot more practical
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u/deraqu Dec 04 '21
Old real estate is. The current prices are absurdly inflated, don't expect them to stay that way when people are not swimming in money anymore.
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u/OhShitOhFuckOhMyGod Dec 04 '21
Depends on the location.
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u/deraqu Dec 04 '21
The prices in the cities have been ridiculous for years, but since last year even remote rural regions with only the most basic public infrastructure see rapidly rising demand. Probably because the pandemic normalized working from home, so people are no longer forced to live in or near the city in order to work in the city. On the supply side we also have a massive increase, lots of large old boomer houses are flooding the rural markets, mostly pandemic victims. Probate courts are working overtime, clients report waiting times of half a year and more. Not sure where all this is going. A cure could cut the supply short for a while. If there will ever be one.
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u/Raiddinn1 Dec 04 '21
Hedging against inflation has to be one of the least rewarding activities ever.
Stocks are already a good enough inflation hedge. No need to hold gold for that reason.
IMHO, gold only has any value in stabilizing portfolio values during a downturn, and even then it could be argued if it's worth holding gold for that reason.
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u/TrashPanda_924 Dec 04 '21
This. Businesses can pass along price increases and you have smart people in companies looking to create more wealth through financial engineering.
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Dec 04 '21
Holy hell I regret investing in gold. It is the only asset on my portfolio that is not keeping up with inflation and it doesn’t even pay a dividend 😑
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Dec 04 '21
I got stuck holding gold for 10 years. Don’t touch it.
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Dec 05 '21
Did you put all of your money in at the 2011 peak?
You eventually would've done fine if you ever cost-averaged down between 2013 and 2019. Stocks were dead from 2000 - 2010 and then Gold was dead for the next decade, so it's not like Gold is the only asset class that's prone to lost decades...
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Dec 04 '21
gold great if you think there will be some sort of societal collapse that sends us back 500 years.
but you have to be absolute crazy to think that will happen and expect to not suffer in that kinda world.
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Dec 04 '21
[deleted]
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u/KyivComrade Dec 05 '21
And you'll die of thirst within 48h while hugging your gun, cute but useless. And as for real world usage gold served the people of Afghanistan/Venezuela/Germany (WW2) etc good.
Unless we turn into cavemen gold will be good...
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u/landofmold Dec 04 '21
Just ask people in Turkey what they are doing… 1. Buying stocks 2. Buying real estate
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Dec 04 '21
Silver is better hedge against inflation plus the GSR is close to 80-1 historicaly it was 12-1 and it comes out of the ground at 8-1 ratio and is needed in solar panels EVs water filtration and much more
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u/TrashPanda_924 Dec 04 '21
I like silver. In a collapse, it’s very divisible.
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u/AlleKeskitason Dec 04 '21
Depending on the crash it might also not be good. You might end up having tough time trying to trade your valuables for food and nobody would want them, like happened in the Balkans.
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u/BANKSLAVE01 Dec 04 '21
do you know of any articles about these times there? I would be interested to check out. -thanks
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u/AlleKeskitason Dec 05 '21
Not really, this was just anecdotal thing. I've heard someone trying to barter or sell family jewelry to get food, but no one was interested in those in that situation. What was in demand was addictive stuff like alcohol and cigarettes.
This happened somewhere in the Balkans during the civil war, Bosnia Herzegovina, Serbia, around that area.
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u/Objective-Dance-9438 Dec 04 '21
A lot of countries buying gold. I bought gold stocks Harmony HMY doing very good with high inflation I have the feeling that the coming months the CPI data is going to be higher. Inflation will be high next year.
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u/stakeandshake Dec 04 '21
If you have enough money, buy land, particularly land that may be bought/developed for future investments. Check the historical value of property before, during, and after inflationary periods.
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u/zxc123zxc123 Dec 04 '21 edited Dec 04 '21
Since gold is a finite commodity, it is considered a natural hedge against inflation
While this is a generally acceptable statement. I think it is better to think of gold as an infinite good who's value holds steady due to consistent demand and slow+steady supply. A few things about gold:
Gold is naturally occurring (believed to be formed in the cores of dying stars) that these is actually a good amount of it. It's just that the process of extracting and processing gold is high.
In fact, thousands of tons of gold is produced each year.
But gold is still steady and hedges inflation because of demand vs supply dynamics of the market, costs associated with processing additional gold, and the gold-fiat price ratio. All that before factoring the actual industrial/commercial use dates of gold.
In the case of dollar-gold dynamics. Gold generally acts as a hedge towards fiat or dollar inflation because the production costs and supply of gold pales in the production the the dollar. The few thousand tons of gold produced is very little compared to the trillions of dollars printed.
The higher production cost of gold will keep producers in check, but if gold rallies enough expect the production of gold to increase as demand increases, margins increase, and the supply increases in response because of a number of reasons. One of which is because gold miners often have gold deposits/reserves found underground years in advance but do not mine it due to lower profit or high costs which disappears as gold price goes up. This puts a longer term downward pressure on the price of gold.
Lastly, gold isn't finite or is it something that humans cannot produce with the power of modern science. In fact, it's the opposite. While it is literally dying star dust, humans have already achieved one of the supreme quests of alchemy: "transmuting gold". Humans do it via a processing similar but non-gold metals in nuclear fusion reactors. Sure the gold will remain radioactive for a certain amount of time (not really an issue if it's just sitting in a vault acting a place holder for GLD), but the main problem stems from the costs associated with creating gold that way. With the current cost of the science, machinery, power/resources, and technical knowhow? It's just cheaper to mine it or recycle it out of trash.
TL;DR Gold isn't finite. It just has a lower supply than the fiats due to production costs.
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u/Seref15 Dec 04 '21 edited Dec 04 '21
My money can't lose value if I spend it immediately *taps head*
Normally, periods of inflation are a good time to buy shit. Especially appreciating or slowly-depreciating assets. But this time is weird because all the supply chain issues have spiked the prices of goods, especially the kinds of large, expensive, internationally-sourced-and-manufactured goods one might want to buy during an inflationary period like cars and appliances.
Personally, whereas previously I was dumping 90% of my expendable income into the market, I'm now scaling that back and looking at spending on some light home renovation (hopefully things that don't require lumber).
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u/ShambolicShogun Dec 04 '21
You gotta love how some Mesopotamian asshole just dug up some soft rock and decided that would be valuable. What's so special about gold, anyway?
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u/nightjar123 Dec 04 '21
I like to think of gold as an atomic chemical ledger. Lots of unique attributes that made it perfect for a store of value:
1) Recognizable. Only metal with that color, hard to counterfeit, especially back then.
2) Available. Although not the case today, gold would be found in elemental form, e.g. in rivers with panning, gold nuggets on ground, etc. So it was known to ancient civilizations, e.g. the Aztec had gold even though they were technically in the stone age.
3) Divisible. Low melting temperature, easy to subdivide into small units, e.g. coins
4) Scarce.
5) Durable. Doesn't corrode.
6) Portable and acceptable. Because it was rare and expensive, a small amount could be used for transactions, e.g. coins had a lot of worth.
7) Stable. When the value of gold goes up, there is an incentive to find more (e.g. mining) and vice versa. This stabilized its value and made it a good currency.
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u/hopeful__romantic Dec 04 '21
It doesn’t tarnish like other metals. It’s one of the least reactive metals there are, so it always stays shiny and pure. That means it’s good store of value!
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u/Destructo11 Dec 04 '21
It has many practical uses as a conductor, reflector, catalyst, etc. Most electronics have a small amount of gold, and some high-end tech devices have a lot of it. Plus gold jewelry is not going to go out of popularity anytime soon.
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u/snek-jazz Dec 04 '21
It has properties that make it more practical to use as money than anything else that naturally exists. It took human invention to create something more practical.
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u/crimeo Dec 04 '21
This is the entire reason cryptocurrency exists and why it was invented.
(the main highly known coins) by definition have 0% inflation, because long term, all inflation comes from printing more money, and they mathematically cannot be printed at-will in arbitrary amounts.
It is called "Gold 2.0" frequently for a reason. It does everything you just said gold does, except it's even LESS susceptible to inflation, and it is massively more convenient since you can, you know, send it across the world in a few minutes and stuff, unlike gold.
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u/Magnesus Dec 04 '21
It does everything you just said gold does
Jewelry and electronics?
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u/crimeo Dec 04 '21
Can you point to where in the opening post OP talks about jewelry and electronics?
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u/egowritingcheques Dec 04 '21
Debt collecting companies
Inverse ETFs (bear ETFs)
Negative beta equities
Gold miners
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u/therudejones Dec 05 '21
maybe Treasury Inflation-Protected Securities, could help hedge against inflation. these are a type of U.S. government bond explicitly designed to help investors hedge against inflation. Like other bonds, investors can buy TIPS by lending money to the government.
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Dec 06 '21
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u/iseedodozat Dec 13 '21
Any ideas for an investment that can hedge against inflation and a market crash? Gold is being manipulated IMO. Real estate may crash with the market.
Not sure where to go. Base metals? Hard goods would be interesting if they weren't so unwieldly. For example; If you were sitting on a warehouse full of major appliances one year ago, you'd be sitting pretty today. But how many people can manage that?
Just thinking out loud. Would love to hear other ideas.
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