Investment Ideas For An Inflationary Environment

Over the past decade, a lot of money has been printed. It was not printed by the U.S. Treasury but in the form of debt instruments by investment banks and others. These debt instruments (which were not subject to any regulation or oversight) became currency which was spent on commodities, stocks, bonds and real estate, including houses. Because this new currency was so plentiful, all of these things had their prices inflated to bubble levels. When a few of the debt instruments became subject to default, a wide range of debt came into doubt and the liquidity of this manufactured currency dried up – financial institutions became reluctant to recognize that it had the value previously assumed. The new currency was no longer working the way it had been and demand for the inflated items (commodities, houses, etc) began to fall.

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7 Responses to “Investment Ideas For An Inflationary Environment”

  1. Andy Says:

    Great contrarian advice. Also enjoyed your recent comment on the SeekingAlpha “Deflation Scam” article. My question, should gold also be considered a commodity for investment. Consider this excerpt (from AsiaTimes)

    According to James Conrad, Professor Emeritus of Economics and former Dean of the School of Business Administration at the University of Indianapolis, Bernanke is well aware that the new money he is feverishly airdropping has not stopped and will probably not stop the bloodbath in the stock market. Further devastation of share prices will render pension funds insolvent. To prevent this, the dollar needs a massive devaluation, on the pattern of FD Roosevelt’s tinkering with the value of gold. I quote:

    “Anyone who reads the written works of our Fed Chairman will know that Bernanke’s long term plan involves devaluing the dollar against gold. This is the exact opposite of the position of most prior chairmen. He has overtly stated his intentions toward gold, many times, in various articles, speeches and treatises written before he became Fed Chairman. He often extols the virtues of F D Roosevelt’s gold revaluation/dollar devaluation back in 1934, and credits it with saving the nation from the Great Depression. According to Bernanke, devaluation of the dollar against gold was so effective in stimulating economic activity that the stock market rose sharply in 1934, immediately thereafter. That is something that the Fed wants to see happen again.”

    “It is only a matter of time before gold is allowed to rise to its natural level. Assuming that about one half of the recent increase in Federal Reserve credit is neutralized, the monetized value of gold should be allowed to rise to between $7,500 and $9,000 per ounce as the world goes back to some type of a gold standard. In the nearer term, gold will rise to about $2,000 per ounce as the Fed abandons its hopeless campaign to support Comex short sellers in favor of saving the other, more productive, functions of various banks and insurers.

    “Revaluation of gold, and a return to a gold standard, is the only way that hyperinflation can be avoided while large numbers of paper currency units are released into the economy. This is because most of the rise in prices can be filtered into gold. As the asset value of gold rises, it will soak up excess dollars, euros, pounds, etc, while the appearance of an increased number of currency units will stimulate investor psychology; and lending and economic output will increase all over the world. Ben Bernanke and the other members of the FOMC Committee must know this, because it is basic economics.”

    • piedmonthudson Says:

      Andy, good thoughts on gold. I feel it is a possible position for an inflationary environment. Personally, I have not been using gold in my portfolios. If I were to use gold I doubt I would ever go over 10%. I much prefer to use positions in oil and industrial metals and the related stocks because I understand how they will behave at various points in the business cycle and they do make good inflation hadges as well. If we ended up in a period of time when we had inflation and no economic growth, gold would be much more attractive to me.

      You certainly have done a good job with your research. The quote from Prof. Conrad is very interesting and thought provoking.

  2. Andy Says:

    How do you feel about ETNs vs. ETFs?

    Another commodity possiblity is platinum. Barclays has an ETN, PGM, which tracks a platinum index. Through the first half of this year, the platinum to gold ratio was 2 to 1; then the price of platinum fell and Friday the ratio went negative, with platinum closing at 865.20 to gold’s 867.50. Platinum is said to be 30 times rarer than gold.

    • piedmonthudson Says:

      Andy –

      You are obviously doing more good research. For precious metals I personally feel ETFs and ETNs are the simplest and most versatile way to invest. They are liquid (trade every day), easy to track and get good charts (for free). I have not checked recently for leveraged funds (which I might possibly prefer), but GLD is my preference for gold, if only for the large daily trading volume. I have not looked into PGM, but the Pt/Au arbitrage is worth evaluating. Of course, on a cyclical basis Pt looks attractive by itself. I have used XME for industrial metal investment, but have allocated more to individual stocks such as BHT, RTP, FCX and PCU.
      Disclosure: I have not (nor have my clients) owned any precious or industrial metals since late 2007, but I am now actively following this area for potential re-entry. I do have a gold-linked CD with Everbank, 5 year term, maturing in 2011.

  3. Heartburn Home Remedy Says:

    This topic is quite trendy in the net at the moment. What do you pay attention to when choosing what to write about?

    • piedmonthudson Says:

      I follow financial and investment news as a financial planner and investment advisor. I keep a current list of potential topics for analysis or opinion articles and select from that list at least once a month. My selection of topics is based on what I perceive is not receiving the attention it deserves.

  4. day trading Says:

    fx street

    Investment Ideas For An Inflationary Environment | Piedmonthudson’s Weblog

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