How to Hedge Against Inflation | 4 of the Best Inflation Hedges (2022)

Have you ever noticed that, as time goes by, goods seem to become increasingly expensive? You are not imagining it, it is an undeniable fact that ten pounds today does not buy you the same amount as it would have 20 years ago.

This is due to inflation, which, although may sound bad, is a perfectly normal phenomenon. In fact, a certain amount of inflation is actually desirable in a healthy, well-functioning economy. But when inflation gets out of control, it can start to put your hard-earned money at risk. This is why it is important for investors to hedge against inflation.

Table of Contents

  • What Is Inflation?
  • What Is Hedging?
  • Why Do I Need to Hedge Against Inflation?
  • How to Hedge Against Inflation
  • Hedge Against Inflation With Admirals

What Is Inflation?

Inflation is the rate at which goods and services rise in price over a period of time and, consequently, the rate at which a currency loses value, or purchasing power.

Naturally a currency losing its purchasing power sounds like a terrible thing, particularly for consumers. However, most large, developed economies actually target a low, stable rate of inflation of around 2%, as it encourages a certain amount of spending over saving which, in turn, helps boost economic activity.

It is also seen as far preferable to the alternative of deflation, where prices decrease and a currency’s purchasing power increases. This, despite sounding good on the surface, can lead to an unproductive economy, as consumers are less willing to part with their money.

What Is Hedging?

Hedging is a method used in the financial markets by traders and investors in order to mitigate risk. This is typically done by opening an opposing position in the market in order to offset any loss incurred on their main position.

A simple way to think of hedging is as an insurance policy, which you might choose to take out in order to protect yourself against any adverse movements in your investments.

But what does this have to do with inflation?

When we talk about hedging against inflation, we are talking about protecting your capital against the devaluing effect which inflation has upon it. Therefore, in order to hedge against inflation, investors need assets which will not be adversely affected by rising inflation.

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Why Do I Need to Hedge Against Inflation?

When the inflation rate is lower than, or the same value as, interest rates, inflation does not pose a significant danger to savers. When this is the case, the rate at which your savings are losing value due to inflation is being offset by the interest you are earning for storing your money in the bank.

The problem arises when inflation begins to outstrip the interest rate, a scenario which is currently a reality in many countries around the world. When this happens, money which is sitting in the bank loses value with every day that passes.

Global interest rates have been at historic lows for more than a decade, ever since the ‘Great Recession’ of 2008, whilst inflation is beginning to creep up above the desired levels.

The causes of this recent increase in inflation are two-fold. Firstly, many central banks have been steadily increasing the supply of money in circulation throughout the coronavirus pandemic – a process known as quantitative easing – in an attempt to kick-start their economies. This has an unavoidable consequence of devaluing currency. Furthermore, as economies around the world begin to get back on track after the economic shock of the pandemic, demand is increasing at a rate faster than supply, which is pushing up prices.

In the US, for example, inflation recently exceeded 5% for the first time since 1990, whilst the interest rate remains sitting at a paltry 0.25%. Based on these figures, money currently saved in US banks is essentially losing value at a rate of around 4.75% a year.

Therefore, now, more than ever, it is important for investors to hedge against inflation. But what are the best ways to protect yourself against inflation?

How to Hedge Against Inflation

So how can an investor effectively hedge against inflation? We will now introduce some of the best inflation hedge investments.

Commodities

In order to hedge against inflation, investors need to place their money in an asset whose price is rising in tandem with or, preferably, at a faster rate than inflation. Commodities are one such asset class which can be used as an inflation hedge.

During times of inflation, investing in commodities can help preserve your money's buying power. Commodities are the building blocks for other goods and services, so it follows that when these goods and services rise in price, their respective commodities will also rise in price.

Naturally, for logistical reasons such as storage, it is impractical for investors to hedge against inflation by purchasing physical commodities. This is why financial derivative products, such as Contracts For Difference (CFDs) are a useful tool for investors hoping to hedge inflation by investing in commodities.

(Video) The 7 Best Inflation Hedge Assets and ETFs for 2022

In order to gain greater exposure to the commodity market, investors may prefer to choose a commodity Exchange-Traded Fund (ETF) such as the iShares S&P GSCI Commodity Indexed Trust ETF.

Depicted: Admirals MetaTrader 5 - iShares S&P GSCI Commodity Indexed Trust ETF (GSG) Weekly Chart. Date Range: 14 October 2018 – 25 August 2021. Date Captured: 25 August 2021. Past performance is not a reliable indicator of future results.

However, investors considering investing in commodities to hedge against inflation will want to consider the fact that commodity prices tend to be very volatile. Due to the fact that commodities can generally only be produced in certain parts of the world, their prices are very sensitive to factors such as geopolitical events and weather.

There is one particular commodity, however, which is considered above all to be the best for hedging inflation.

Gold as Inflation Hedge

Forgive the pun, but when it comes to hedging against inflation, gold is viewed by many as the gold standard.

Gold is considered to be a safe-haven asset – which means that during periods of high inflation and economic uncertainty, investors traditionally flock to this precious metal, increasing demand and pushing up price.

This safe-haven quality was evident most recently during the coronavirus pandemic. Whilst many other assets plummeted in value, gold prices soared to record all-time highs. If, as anticipated, inflation continues to rise over the coming months you can expect the price of gold to also increase.

Depicted: Admirals MetaTrader 5 – Gold Weekly Chart. Date Range: 27 December 2015 – 25 August 2021. Date Captured: 25 August 2021. Past performance is not a reliable indicator of future results.

Together with gold, other precious metals such as silver and platinum are also viewed as safe-haven assets and, therefore, good investments to hedge against inflation.

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(Video) Gold is not the best inflation hedge, these assets are better – Adrian Day

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Property Inflation Hedge

The property market is historically proven to be a reliable way to hedge against inflation. In periods of increased inflation, not only do property prices tend to rise, but so too does the rent which landlords charge their tenants.

Investing in physical property does require a substantial minimum investment, however, there are good alternatives available for investors such as Real Estate Investment Trusts (REITs) and property ETFs.

REITs are publicly traded companies which pool investor money in order to purchase income generating properties, such as apartment or office buildings. Furthermore, REITs are obliged to pay out 90% of their taxable income as dividends, which makes them an attractive option for income investing as well.

An example of a REIT which has been performing well this year, has an attractive current dividend yield of around 2.8% and which might prove a good option for hedging against inflation in 2021 is the Tritax Big Box REIT - which focuses on investments in large logistics facilities.

Depicted: Admirals MetaTrader 5 – Tritax Big Box REIT Weekly Chart. Date Range: 6 December 2015 – 25 August 2021. Date Captured: 25 August 2021. Past performance is not a reliable indicator of future results.

Stocks as Inflation Hedge

A well-constructed portfolio of stocks is seen as a good inflation hedge over the long-term. However, not all stocks perform well during periods of high inflation. Naturally, in order to effectively hedge against inflation, you need to find stocks in companies which are experiencing a higher rate of return than the rate of inflation.

Certain stocks in certain industries can achieve this. One option would be to buy shares in companies which are engaged in the industries we have looked at already in this article. For example, with respect to gold and other commodities, you could evaluate the possibility of buying shares in mining companies.

Other stocks to look for in order to hedge against inflation are those which are able to weather economic turmoil without losing consumer demand for their goods or services. For example, companies which provide consumer staples – everyday goods which people need – fit this bill. Consumer staple products tend to have inelastic demand – meaning that consumers will keep purchasing them regardless of their financial situation.

Some examples of companies which provide staple goods are Unilever, British American Tobacco, Diageo and Coca-Cola.

Depicted: Admirals MetaTrader 5 – The Coca-Cola Co. Weekly Chart. Date Range: 29 November 2015 – 26 August 2021. Date Captured: 26 August 2021. Past performance is not a reliable indicator of future results.

Hedge Against Inflation With Admirals

You will be pleased to know that, with Admirals, you can hedge against inflation using all the methods which we have examined in this article!

(Video) In Search of the Ultimate Inflation Hedge

A Trade.MT5 account allows traders to trade CFDs on a range of commodities, including gold, whilst an Invest.MT5 account allows investors to purchase shares and ETFs from 15 of the largest stock exchanges in the world!

In order to start hedging against inflation with Admirals, follow these steps:

  1. Register with Admirals
  2. Log in to your ‘Trader’s Room’ account
  3. Once inside your account, scroll down to the Live Accounts section and select ‘Open Live Account’
  4. You will need to provide your contact details, tax information and passport number, before confirming which type of account you wish to register for

Your application will then be reviewed by Admirals who will contact you by email in order to advise of the outcome. If your application is successful, you will also receive your account details by email.

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(Video) 5 Must-Have Investments When Inflation is High (Under 15 Minutes!)

This material does not contain and should not be construed as containing investment advice, investment recommendations, an offer of or solicitation for any transactions in financial instruments. Please note that such trading analysis is not a reliable indicator for any current or future performance, as circumstances may change over time. Before making any investment decisions, you should seek advice from independent financial advisors to ensure you understand therisks.

FAQs

How do you hedge against inflation and recession? ›

Shifting funds from bonds to stocks, especially preferred shares, is one strategy. Real estate usually performs well in inflationary climates; REITs are the most feasible way to invest. Adding global stocks or bonds to your portfolio also hedges your portfolio against domestic inflationary cycles.

What is an example of an inflation hedge? ›

For example, if the dollar loses value from the effects of inflation, gold tends to become more expensive. So an owner of gold is protected (or hedged) against a falling dollar because, as inflation rises and erodes the value of the dollar, the cost of every ounce of gold in dollars will rise as a result.

What is a good hedge against inflation and why? ›

Common anti-inflation assets include gold, commodities, various real estate investments, and TIPS. Many people have looked to gold as an "alternative currency," particularly in countries where the native currency is losing value.

How do you hedge against inflation 2022? ›

Three ways to protect against inflation in 2022
  1. Look to real estate for inflation protection. ...
  2. Rely on equities, especially cyclical ones, to drive capital appreciation. ...
  3. Avoid excess cash, and consider borrowing.
14 Dec 2021

What are the best hedges against a recession? ›

Hedging for a United States Market Recession

Safe havens include Treasuries and Treasury Inflation-Protected Securities, U.S. government bonds, and corporate bonds of high-credit-quality American companies.

How do you trade against inflation? ›

How to Profit From Inflation
  1. Commodities like gold, oil, and even soybeans should increase in price along with the finished products that are made with them.
  2. Inflation-indexed bonds and Treasury Inflation-Protected Securities (TIPS), tend to increase their returns with inflationary pressures.

Which provides the greatest hedge against inflation? ›

Investing in real estate is probably the single best long-term inflation protection, because it tends to increase in value in all types of economic environments. Real estate also offers multiple investment options. For example, you can invest in individual properties.

What are 3 examples of inflation? ›

What Are the Three Main Types of Inflation?
  • Demand-pull inflation.
  • Cost-push inflation.
  • Built-in inflation.
27 Jul 2022

What asset is the perfect inflation hedge? ›

Commodities. Commodities are often the first asset class investors think of when looking for inflation hedges. These are raw materials including oil, natural gas, precious metals, wheat and corn.

What is a real life example of inflation? ›

One of the most straightforward examples of inflation in action can be seen in the price of milk. In 1913, a gallon of milk cost about 36 cents per gallon. One hundred years later, in 2013, a gallon of milk cost $3.53—nearly ten times higher.

What does it mean to hedge against something? ›

Definition of hedge against

: to protect oneself from (something) They hedge against inflation by investing their money. looking for ways to hedge against risk/failure.

What hedging means? ›

Hedging is a strategy that tries to limit risks in financial assets. It uses financial instruments or market strategies to offset the risk of any adverse price movements. Put another way, investors hedge one investment by making a trade in another.

How do you hedge? ›

You can implement a hedge by buying another asset, or by short selling an asset. Purchasing an asset like an option transfers the risk to another party. Short selling is a more direct form of executing a hedge.

What type of hedge is best? ›

Camellia, laurel and hawthorn are all good privacy hedges. These fast-growing hedges are all evergreen and reach a good height. Evergreen shrubs and evergreen trees for gardens make for the best hedges for privacy as you don't want your privacy to be compromised when the leaves fall off in fall.

What are some hedging techniques? ›

Types of hedging strategies

Use of derivatives: futures, options and forward contracts. Pairs trading: taking two positions on assets with a positive correlation. Trading safe haven assets​: gold, government bonds and currencies such as the USD and CHF.

What are the three ways of controlling inflation? ›

There are four basic strategies that central banks have used to control and reduce inflation: exchange-rate pegging; monetary targeting; inflation targeting; and.

What are three ways to prevent inflation? ›

As President Biden has remarked numerous times, “bringing down the deficit is one way to ease inflationary pressures.” This could include avoiding further deficit-boosting measures; lowering health care costs; raising tax revenue; reducing consumption-oriented spending; promoting work, savings, and investment; and/or ...

What is the smartest thing to do during inflation? ›

Buy bonds

You can choose from corporate bonds issued by private and public companies, municipal bonds from local governments, or treasury bonds by the federal government. You may even want to consider I bonds, which are government-issued savings bonds specifically focused on protecting investors from inflation.

Who benefits from inflation? ›

2. Equity and Commodity Investors. Despite low economic growth rates, investors can benefit from inflation if they hold the correct stocks and commodities in their portfolios. Equity investors: Putting your money in stocks is much better than holding cash during times of high inflation.

What are the 3 main causes of inflation? ›

The main causes of inflation can be grouped into three broad categories: demand-pull, cost-push, and. inflation expectations.

Where do you park money for inflation? ›

Real estate traditionally does well during periods of higher inflation, as the value of a property can increase. This means your landlord can charge you more for rent, which in turn increases their income so it is on pace with the rising inflation.

What should I invest in to beat inflation? ›

Which investments perform well with high inflation?
  • Treasury Inflation Protected Securities (TIPS) US Treasury securities are essentially loans to the US Government. ...
  • Gold. ...
  • Other precious metals. ...
  • Commodities.
14 Oct 2022

What investments are best during inflation? ›

Buying inflation bonds, or I Bonds, is an attractive option for investors looking for a direct hedge against inflation. These Treasury bonds earn monthly interest that combines a fixed rate and the rate of inflation, which is adjusted twice a year.

What was the worst inflation in history? ›

Between the end of 1945 and July 1946, Hungary went through the highest inflation ever recorded. In 1944, the highest banknote value was 1,000 P. By the end of 1945, it was 10,000,000 P, and the highest value in mid-1946 was 100,000,000,000,000,000,000 P (1020 pengő).

What country printed too much money? ›

At its height, hyperinflation in Weimar Germany reached rates of more than 30,000% per month, causing prices to double every few days. 2 Some historic photos depict Germans burning cash to keep warm because it was less expensive than using the cash to buy wood.

What country had the worst inflation? ›

Venezuela

› ... › Advanced Concepts ›


What Is an Inflation Hedge?

https://www.investopedia.com › ... › Advanced Concepts
https://www.investopedia.com › ... › Advanced Concepts
An inflation hedge is an investment that is considered to provide protection against the decreased value of a currency, made by investing in safe-haven assets a...
Investing for inflation involves picking assets that are good inflation hedges: They appreciate, are tangible, or pay variable interest.
Inflation hedge is an investment that is made for the purpose of protecting the investor against decreased purchasing power of money due to rising prices of.

How does Warren Buffett hedge against inflation? ›

Common advice involves investing in things that increase in value as prices rise, such as real estate, commodities, and Treasury Inflation-Protected Securities (TIPS). Stocks can offer longer-term protection, too, since they generally appreciate faster than inflation.

What investments do well during inflation? ›

Here's where experts recommend you should put your money during an inflation surge
  • TIPS. TIPS stands for Treasury Inflation-Protected Securities. ...
  • Cash. Cash is often overlooked as an inflation hedge, says Arnott. ...
  • Short-term bonds. ...
  • Stocks. ...
  • Real estate. ...
  • Gold. ...
  • Commodities. ...
  • Cryptocurrency.

What assets are best during inflation? ›

The following investments tend to fare well during periods of inflation: Commodities like gold, oil, and even soybeans should increase in price along with the finished products that are made with them.

What should I invest in to beat inflation? ›

Which investments perform well with high inflation?
  • Treasury Inflation Protected Securities (TIPS) US Treasury securities are essentially loans to the US Government. ...
  • Gold. ...
  • Other precious metals. ...
  • Commodities.
14 Oct 2022

What does Warren Buffett do during inflation? ›

The higher the inflation rate, the more quickly cash loses value. Investments, on the other hand, generally grow over time. That's why during periods of high inflation, Musk and Buffett both recommend investing in strong companies whose stocks are likely to stay consistent.

What is Warren Buffett's 5 25 rule? ›

It's deceptively simple, actually. The 5/25 rule works because you're essentially acknowledging the exceptionally simple fact that you can't focus on lots of things at once. Just as you can't hold down 25 jobs, you can't work towards 25 goals at once. For a goal to get on the list, it must hold value and/or meaning.

What is the smartest thing to do during inflation? ›

Buy bonds

You can choose from corporate bonds issued by private and public companies, municipal bonds from local governments, or treasury bonds by the federal government. You may even want to consider I bonds, which are government-issued savings bonds specifically focused on protecting investors from inflation.

Who benefits from high inflation? ›

1. Fixed-rate mortgage holders. Anyone with large, fixed-rate debts like mortgages benefit from higher inflation, says Mark Thoma, a retired professor of economics at the University of Oregon. Those interest rates are locked in for the life of the loan, meaning they won't ebb and flow with inflation.

What should I buy before hyperinflation hits 2022? ›

I Bonds. One excellent inflation investment strategy that you can take advantage of in 2022 is to invest in I Bonds. These U.S. savings bonds earn interest based on a fixed interest rate and the inflation rate.

What is the safest asset to own? ›

Some of the most common types of safe assets historically include real estate property, cash, Treasury bills, money market funds, and U.S. Treasuries mutual funds. The safest assets are known as risk-free assets, such as sovereign debt instruments issued by governments of developed countries.

Videos

1. Inflation 2021: The Secret Asset Billionaire's use to Hedge
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2. Warren Buffett Explains How To Invest During High Inflation
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3. 7 Best Inflation Hedges (protect your money)
(GoodFinancialCents® - Jeff Rose, CFP®)
4. Patrick Bet-David's Advice For Hedging Against Inflation
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5. WAYS TO HEDGE AGAINST INFLATION: WHAT TO INVEST IN DURING INFLATION | (HEDGING AGAINST INFLATION)
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6. What is the #1 Hedge Against Inflation? - Robert Kiyosaki, @The Jay Martin Show
(The Rich Dad Channel)

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