Leonhard Foeger/Reuters/File
A worker at the Austrian Mint (Muenze Oesterreich) checks a gold Vienna Philharmonic bullion coin for defects in the company's headquarters in Vienna in April. Gold has lost some of its luster in the past two years as prices have tumbled by a third. But there are plenty of options for investors looking to guard against inflation.

Do you need inflation protection?

Investors have an unprecedented array of inflation-protection tools to safeguard their portfolios: from gold and inflation-protected bonds to commodity mutual funds. Choosing how to hedge against inflation depends on your situation and outlook.

The Federal Reserve's unprecedented easing has pushed it between a rock and a hard place. The longer it stokes the economy's engines with unprecedented bursts of money, the more analysts worry about inflation. Whenever the Fed talks of pulling back, the markets tank – as it did last week. Mortgage rates, meanwhile, saw their biggest one-week jump in 26 years.

What's a central banker to do?

Two things could force the Fed's hand: a loss of confidence in US debt in the bond market or the reappearance of inflation. Many analysts are convinced that, given the scale of the Fed's pump priming, inflation is inevitable.And it doesn't take a doomsday scenario. Even moderate inflation takes its toll. A $1 million portfolio in 1990 would take more than $1.75 million to replicate today. 

For investors worried that inflation will take off soon, there is an unprecedented array of inflation-protection tools to safeguard a portfolio: from gold and inflation-protected bonds to commodity mutual funds. Choosing how to hedge against inflation depends on one's individual situation and outlook.

"A variety of issues are causing concern among investors trying to preserve their real wealth, including rising commodity prices, rapid economic growth and resource use in emerging markets, ultra-loose monetary policy in developed markets, and social and political unrest in resource-rich countries around the world," says a Morningstar research report issued in January. "The prospect of higher inflation affects investors because the higher the inflation rate, the faster the value of their savings erodes."

Gold, the traditional inflation hedge, has lost some of its luster lately. Since peaking in 2011, the precious metal has declined by about a third. Many analysts think gold has further to fall. Still, should the stock market fall sharply or inflation begin to rear its head, gold could shine again. There are several strategies for owning gold directly, either holding the metal oneself or through an exchange-traded fund, or indirectly, by owning shares of gold mining companies or shares of a mutual fund or ETF that invests in them.

For those especially worried that shares of a mutual fund or gold mining company could become worthless, holding physical gold, either in coins or bars, is a big attraction, said Edmund Moy, former director of the US Mint and now chief strategist for Morgan Gold, in a telephone interview.

"Physical gold is always going to be worth something," he said, "so physical gold has that extra measure of protection for people concerned about inflation." (Morgan is a gold-investing firm in Irvine, Calif.)

Another popular option for inflation-phobes are US Treasury Inflation Protected Securities or TIPS. They have the advantage of automatically adjusting coupon payments and final principal payments to track the federal consumer price index. The disadvantage is that as Treasury bonds, they offer the lower returns of conservative bonds at a time when interest rates are at record lows. Since TIPS themselves tend to be 20- or 30-year bonds, investors buying TIPS today would have below-market returns whenever interest rates rise to more normal levels, Chris Philips, senior analyst in the Vanguard mutual fund company's investment strategy group, told Morningstar. Accordingly, Vanguard offers its own Vanguard Inflation-Protected Securities Fund (VIPSX), which focuses on holding "the shorter end of the vast maturity spectrum" of TIPS "to track inflation more tightly."

Another inflation hedge is commodities. Some analysts foresee a boom, based on forecasts that finite natural resources won't be able to keep up with a growing, wealthier world population. Commodity fund investments in raw materials such as agriculture, energy, and precious metals offer many choices, whether investing directly in actual commodities or in commodity-linked derivative instruments. Investors can choose commodity funds such as Nuveen Long/Short Commodity Total Return Fund (CTF), DWS Enhanced Commodity Strategy Fund (SKNRX), PIMCO Commodity Real Return Strategy Fund (PCRDX), Fidelity's Global Commodity Stock Fund (FFGCX), or its Select Natural Resources Portfolio (FNARX) to diversify their holdings.

But now may not be the best time to jump in, since recent reports from the World Bank and Citigroup predict slower growth in demand for commodities and therefore potentially stagnant or lower commodity prices. "Since their highs in 2011, commodities like gold, silver, and oil have all been in relentless downtrends," the Bespoke Investment Group points out. After price jumps in April for three popular ETFs – SPDR Gold Shares (GLD), United States Oil Fund (USO), and iShares Silver Trust (SLV) – "the rallies have all since fizzled and resulted in lower highs," adds Bespoke, a market-strategy firm in Harrison, N.Y.

Before you rush out to buy gold, TIPS, commodities, or some other inflation hedge, consult your financial planner. You may find you already are well protected against inflation, because the best inflation hedge could be something you already have:

•A stock portfolio, which historically has offered returns above the rate of inflation.

•A salary and benefits that go up along with inflation.

•A monthly Social Security check adjusted for inflation and, possibly, a pension that does the same.

Financial planners generally figure that getting a $2,500 Social Security check every month is the equivalent of having $400,000 in conservative inflation-protected investments – thereby reducing the percentage of your assets that you otherwise might use to hedge against inflation.

You've read  of  free articles. Subscribe to continue.

Dear Reader,

About a year ago, I happened upon this statement about the Monitor in the Harvard Business Review – under the charming heading of “do things that don’t interest you”:

“Many things that end up” being meaningful, writes social scientist Joseph Grenny, “have come from conference workshops, articles, or online videos that began as a chore and ended with an insight. My work in Kenya, for example, was heavily influenced by a Christian Science Monitor article I had forced myself to read 10 years earlier. Sometimes, we call things ‘boring’ simply because they lie outside the box we are currently in.”

If you were to come up with a punchline to a joke about the Monitor, that would probably be it. We’re seen as being global, fair, insightful, and perhaps a bit too earnest. We’re the bran muffin of journalism.

But you know what? We change lives. And I’m going to argue that we change lives precisely because we force open that too-small box that most human beings think they live in.

The Monitor is a peculiar little publication that’s hard for the world to figure out. We’re run by a church, but we’re not only for church members and we’re not about converting people. We’re known as being fair even as the world becomes as polarized as at any time since the newspaper’s founding in 1908.

We have a mission beyond circulation, we want to bridge divides. We’re about kicking down the door of thought everywhere and saying, “You are bigger and more capable than you realize. And we can prove it.”

If you’re looking for bran muffin journalism, you can subscribe to the Monitor for $15. You’ll get the Monitor Weekly magazine, the Monitor Daily email, and unlimited access to CSMonitor.com.

QR Code to Do you need inflation protection?
Read this article in
QR Code to Subscription page
Start your subscription today