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Global Price Increases Offer Several Investing Solutions for Inflation

by: Gary Gordon July 23, 2008 | about stocks: DIA / DJP / GLD / TIP / WIP    
Gary Gordon

Gary Gordon

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There's a reason that Brazil has been one of the few brighter spots for investors in 2008. It's one of the few places on the planet where inflation isn't far exceeding a central bank's targeted inflation rate.

In the U.S., we target 2%, while inflation runs at 4.2%. In the Eurozone... same thing. And in places like China, where the authorities express a tolerance for 4% inflation, the rate is double that. (India is pushing 12% inflation on an expressed target of 5%.)

For years, of course, if the country's growth kept up with inflation rates, stock markets responded favorably. Now we have global inflationary numbers that are outpacing growth in every region and every country, with the exception of the "B" in BRIC.

Ironically enough, we may be looking at a tipping point. Specifically, the worldwide rise in food and energy prices is the major reason for global inflation. It follows that the Dow Jones AIG Total Commodity Index (DJP) hit a 52-week high as recent as July 2nd. Since then, however, commodity prices from oil to gas to agriculture have pulled back more than 10%.

Commodity_etfs_and_inflation
Most analysts are cautious on the idea that we've hit a peak on commodity prices. Indeed, most seem to believe that the 10% "correction" on the Dow Jones AIG Total Commodity Index may bolster stocks in the short run, but that the Dow Jones Industrials Trust (DIA) won't escape the bearish woods that easily.

Simply put, global inflation hampers global growth. We have already seen significant economic drop-off in both the Eurozone as well as China.

Of course, the hope for stock assets currently rests with the notion that declining demand for commodities will temper inflation and stimulate growth. But again, "hoping" for inflation to moderate and actively attacking inflation with higher interest rates are two different things.

Unfortunately, inflationary forces may be around for a while. And that leaves investors struggling for what to do about it.

One insurance policy on inflation is the inflation-protected security bond. In the U.S., you have the iShares Lehman TIPS Bond Fund (TIP). For foreign markets, you have the SPDR International Government Inflation-Protected Bond Fund (WIP). Unfortunately, they still struggle when the threat of higher interest rates hit bonds in general.

Tips_and_etf
Commodity prices tend to move higher with inflation. And if one is inclined to believe that the recent pullback is more indicative of a mild correction,the Dow Jones AIG Total Commodity Index is still the safest exposure to the asset class as a whole.

That said, gold has one of the best track records alongside inflation. It also does well in times of currency uncertainty. And as I've discussed in previous columns, gold would need to climb to $2000 per ounce to reach its inflation-adjusted highs from 1982. Gold exposure is easy to grab with StreetTracks Gold Trust (GLD).

In addition, regardless of the soaring health care costs, people still get sick. We're as addicted to healthcare products/services as we are addicted to oil. And that makes parts of the health-care industry a safer haven for inflationary periods. (Review my articles on health-care ETFs right here.)

Disclosure Statement: ETF Expert is a web log ("blog") that makes the world of ETFs easier to understand. Pacific Park Financial, Inc., a Registered Investment Advisor with the SEC, may hold positions in the ETFs, mutual funds and/or index funds mentioned above. Investors who are interested in money management services may visit the Pacific Park Financial, Inc. web site.

 

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This article has 5 comments:

  •  
    Jul 23 09:04 AM
    Given the blatant naked shorting of gold (engineering a $30 drop yesterday morning; three $20 drops in three days last week), how can gold be insurance against anything? There is a reason gold isn't $1,000, much less $2,000, and it isn't economics.
    Reply
  •  
    Jul 23 09:07 AM
    I should have added that in the last reporting week, every single open interst long position in gold was matched by a naked short.
    Reply
  •  
    Jul 23 10:31 AM
    Something I've always wondered about.

    If gold is an inflation hedge and it is currently well below its inflation adjusted high, doesn't that mean that gold is not a good inflation hedge?
    Reply
  •  
    Jul 23 11:21 AM
    Good government leadership in Brazil, becoming great nation to invest in. It all starts at the top gentlemen.
    Reply
  •  
    Jul 29 09:00 AM
    Awesome DavyY,that was awesome!! Best insight I have seen in months.
    Reply
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