Beware Of These Faulty “Inflation Protected” Investments

Cryptocurrencies. Some Bitcoin bugs tout the cryptocurrency as “digital gold.” They are mistaken, however.

While there is certainly utility and value, Bitcoin is a purely digital asset with no tangible backing. Moreover, there is no limit on the number of competing digital currencies that can be created.

Cryptocurrencies may have explosive upside potential, but they also carry huge downside risk – irrespective of the inflation rate.

Commodity Instruments. In theory, owning a basket of commodities is a good hedge against inflation. In practice, you probably don’t want to store barrels of oil and bushels of wheat in your basement!

That means you’d have to own speculative derivative instruments that often fail horribly at tracking the price movements of the underlying commodities. Commodity futures, ETFs, and the like are suitable only for short-term speculation, not long-term inflation protection.

Gold and silver mining stocks. Mining companies stand to benefit greatly from rising metal prices. But they are also vulnerable to rising energy and labor cost, carry political risk and the risk of poor management, and can become unstable during a financial crisis.

To be sure, miners can play a role in an aggressive investor’s inflation protection portfolio, they are no substitute for a core holding in physical precious metals.

Numismatic coins. Investors who grasp the need to hold some physical precious metals as part of an inflation protection strategy can still make a big mistake if they buy pricey numismatic coins. The large collectible premium attached to numismatics will not necessarily rise with inflation or match the gains on spot metal prices.

Hard Money Is the Ultimate Inflation Hedge

Gold is a timeless, immutable monetary asset, still widely held by central banks.

In former Federal Reserve chairman Alan Greenspan’s words:

“For more than two millennia, gold has had virtually unquestioned acceptance as payment. It has never required the credit guarantee of a third party… Today, the acceptance of fiat money — currency not backed by an asset of intrinsic value — rests on the credit guarantee of sovereign nations endowed with effective taxing power, a guarantee that in crisis conditions has not always matched the universal acceptability of gold.”
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