July 31, 2021

How to Invest Against Inflation: Diversify Your Investments with Gold

The world of finance has become increasingly concerned about rising inflation in recent months. Ultra-low interest rates, quantitative easing measures, and other factors may all be fueling the recent rise in price pressures. The rapid rise in inflation has caused investors to rethink their strategies and many of them are now looking to make adjustments to their portfolios in order to combat the inflationary increase. 

 Inflation can cause a wide array of financial difficulties and needs to be taken seriously. As the purchasing power of dollars or paper currency declines, so too does disposable incomes and investment returns. Declines in these areas can cause everyday investors to change spending habits or to invest less. This can then cause a cascading effect of lower economic activity that can then pose challenges for everyone. As spending declines, so too does business activity. As business activity drops, so too do promotions, hiring, and other business-related expenses. As inflation approaches or rears its ugly head, investors must look to respond to protect their financial futures. A response can be not only in spending habits or budgeting, but maybe even more importantly in how the investor puts their capital to work. Investing in an inflationary upswing does not need to be overly complicated or cumbersome, but rather requires some simple planning and execution to provide a needed hedge against rising price pressures. There are choices available to investors when it comes to fighting inflation and the choices made may depend on the investor’s financial situation. 

 When it comes to investing for inflation, there are a variety of asset classes that may potentially hold their value far better than stocks or other assets. Precious metals such as gold and silver are considered by many to be the best. These metals not only hold their value during periods of heightened inflation but may also increase in value while also providing a hedge against several key issues such as currency weakness. 

 Inflation is negative because it essentially makes the cost of everyday goods and services more expensive. Not only that, but higher inflation also lessens net investment returns since each dollar earned buys less and less. The effects of higher inflation can lead to economic recession, lower consumer spending, and other negative economic consequences that can directly impact households for years or even decades. That is why purchasing and investing in asset classes that can fight inflation is so important. 

 Gold and silver are both global commodities that are of limited supply. These markets are valued and traded all over the globe and can be used as a medium of exchange anywhere on the planet. 

 The prices of gold and silver are global, meaning they are the same whether you are in Canada, Asia, or Australia. An ounce of gold or silver is the exact same regardless of where you may be located. 

 Unlike fiat currencies, the value of gold or silver cannot be artificially manipulated to serve the economy. The market for these metals is the market. The Federal Reserve or other central banks cannot create more gold or silver out of thin air as they do with currency. Gold and silver carry zero counterparty risk. This is to say that they cannot default, go bankrupt or otherwise screw over their investors. Paper currencies, stocks, bonds, and other paper assets all carry these risks. Many investors have come to learn that the hard way, losing much or even all of their capital in the process. 

 As inflation rises, stocks may have less net profits to report. This can then cause a decline in the corporate share price and losses for investors. The key, therefore, to investing for inflation is to invest in asset classes that may gain in value as prices rise. Both gold and silver have shown a tendency to do just that throughout history. 

 Unlike a stock or a bond, preservation of capital and investment gains are not dependent on corporate earnings. There is nothing that gold and silver need to go out and earn. Their value is determined, rather, by a variety of factors that can influence the metals’ value while also harming the value of other asset classes. Issues such as inflation, currency values, geopolitical events, and the economy can all have an impact on gold and silver as well as other global financial markets. The difference, however, is that many of the potentially negative issues can fuel buying in gold and silver while driving selling in stocks and other assets. Gold and silver can, therefore, better hold their respective values compared to other asset classes. 

 As inflation accelerates, the value of gold and silver may also accelerate. Put simply, as the prices of everyday goods and services climb, so too does the price of gold and silver. This corresponding price rise may provide an important hedge against higher inflation while also protecting capital. This essentially can create a situation in which dollars (which will lose value) are invested into gold or silver (which may gain in value). 

 Although the values of gold and silver may rise during periods of increasing inflation, the prices for these metals can also decline. If you are looking at an investment, therefore, it is important to consider all of the applicable risks associated with the investment to determine if it is appropriate given your financial situation.

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