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Protecting your assets against inflation

The Fed just announced another round of money printing, euphemistically called QE2 (“Quantitative Easing 2”), which will buy up $600 billion worth of US Treasuries over the next 7 months.  Ben Bernanke believes that inflation is too low, and to battle it he’s literally creating more inflation!  If you haven’t already noticed the rises in food and energy prices, it will start becoming painfully obvious in the next couple years.  Currently, the average household spends about 35% of their money on housing costs, 15% on transportation, and13% on food(1).  During periods of hyperinflation or very high inflation, these numbers shift dramatically and you’ll be spending about 80-90% of your paycheck on food and energy and very little on housing costs.  What can you do to protect your purchasing power if the fiat currency of your country degrades significantly?  Well, Peter Schiff has a strategy that I’ll briefly outline from his current book, Crash Proof 2.0.

Peter Schiff is very bearish on the US economy and believes that holding dollars is a risky investment.  Under our current economic climate, we discourage saving and encourage debt, and this is one of many reasons why our economy is seriously flawed.  If you save your money in a bank, you’ll earn almost no interest on it, while every year inflation will keep eating away at it.  In essence, you’ll be earning a negative return on your hard earned money.  In order to protect your wealth, Peter recommends that you hold a very little of it in the US dollar.  For people who have very little means and fear they’ll be unable to afford food the next coming years, investing in what you need most to survive is key.  Nonperishable foods high in carbs, such as beans and rice, are essential if you want to have a reserve of food, and plenty of potable water is also crucial.  Popular staples of everyday life, such as coffee, toilet paper, cigarettes, and even ammo, can also be investments while they are still affordable and later can be used to barter in the unfortunate case that the dollar is no longer accepted.  Learning how to garden can also be useful when food prices began soaring and one needs a way to grow their own food.

If you are looking at hedging against inflation and have the means of investment, Peter recommends a portfolio mixed between foreign assets and precious metals.  For more conservative investors, this portfolio should be weighed heaver towards foreign stocks (~ 80-90%) and less so in precious metals (~10-20%).  Whereas for more speculative investors, this portfolio might be about 70% foreign stocks and about 3o% precious metals.  The reason precious metals should always be a small amount of your portfolio is that their price is highly volatile. But during a period of hyperinflation, a small investment can go a long way, even if your portfolio is only 10% precious metals.  However, it is important to hold at least some precious metals because they will always hold value and they can be used as a means of exchange if the dollar is no longer accepted.  The value of precious metals also tends to remain constant even though their price constantly changes in relative terms of fiat currencies.  For instance, in the 1920’s an ounce of gold could buy you a nice suit at Saks Fifth Avenue.  Today, an ounce of gold can still buy you a nice suit at Saks Fifth Avenue.

When investing in precious metals (ie. gold, silver, platinum, palladium, ect), Peter recommends a mix of privately possessed coins, bullion physically located outside of your country, and a mixed portfolio of mining stocks.  Some coins should be held for trading in the case for when the shit hits the fan (hyperinflation), but they also run the risk of being seized by the government (ie. during the Great Depression by FDR).  Therefore, it’s safe to own some precious metals outside of the US and in politically stable countries, such as with the Perth Mint in Australia.  Mining stocks can also be great investments and their prices tend to rise exponentially with the price of precious metals and inflation.  There are many different levels of mining companies and your portfolio should be a diversified mix.  Ideally, your portfolio should be organized in a risk pyramid, where the biggest portion is with the senior produces and the most stable companies, while the smallest share is with exploration companies and speculative stocks.  When deciding how much to invest in either gold or silver, one should note that silver is more speculative and volatile, but it also tends to outperform gold when the economy here is tanking but economies and production abroad are doing fine.  Besides jewelry and bullion, silver is also commonly used by industrial manufacturing in circuit boards and wiring so demand for it has been steadily increasing in our technological era .  Therefore, holding a little bit of silver has a chance of paying off really big, so Peter recommends owning a ratio of about 10% silver to about 90% gold, the more stable of the two metals.

As far as foreign assets, your portfolio should contain a mixture of foreign currencies and stock.  If you can, it is highly advisable to hold at least 3-6 months of living expenses in another nation’s currency such as the Canadian or Australian dollar, Swiss franc, Chinese RNB, or Japanese Yen.  However, the largest part of your portfolio should be with foreign stocks because of the safety and income.  In particular, Peter is very bullish on foreign energy and commodity stocks.  These tend to pay much higher dividends than most American stocks and have been outperforming them in the long run.  I personally have positions in some Canadian energy stocks and Chinese commodity stocks, and they each have been paying good dividends and have performed exceptionally.  While investing in foreign stocks can seem tricky, Peter’s firm, Euro Pacific Capital, makes it really easy for anyone to do (they also just opened a precious metals division).  Normally I wouldn’t blatantly promote another business on my blog, but as a happy customer I want to see others be made aware of an opportunity to protect their wealth before it is destroyed by government created inflation.

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4 Responses

  1. If you want to earn more of return than a CD, but are not ready to invest in Ireland or Greece instead of the USA, then get some TIPS. These are treasury bonds indexed to inflation. As inflation grows, which it will, then these bonds adjust quarterly to pay more. The mutual fund that invests in this category of bond is available with Goldman Sachs, Franklin Templeton, and MFS. Even the cost of being a hobo is going up, will them air travelers choosing to travel by rail now to avoid getting groped by our government.

  2. […] who didn’t heed the warnings.  For more information about this issue you can read my blog on protecting your assets against inflation and also consider this blog on how investing in silver could possibly bankrupt JP […]

  3. The one problem I have with TIPS is that they use the CPI to measure inflation, and this number is totally fudged by the government. It’s in the government’s best interest to keep CPI low, that way they won’t have to pay more in TIPS and Social Security cost of living increases, and it keeps the masses from worrying about inflation.

  4. To continue my last point, investing in TIPS is like trusting the fox to guard the henhouse.

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