As time passes, more and more Americans are feeling the impact of rising inflation. According to a Pew Research Center survey, inflation is now the top concern for Americans, followed by health care affordability, violent crime, and gun violence.
As inflation remains a pressing issue for average citizens and investors, the value of money continues to decrease. This is why the best inflation hedge investments are those that not only preserve value but also appreciate as inflation rises.
This article will explore inflation hedge investments, the top five investments that protect against inflation, and long-term strategies for safeguarding wealth.
What Is an Inflation Hedge?
An inflation hedge is an investment designed to protect a currency’s declining purchasing power resulting from losing its value due to inflation. As inflation rises, the prices for goods and services increase, and the cash value depreciates. Investments that hedge against inflation usually appreciate or yield returns that either match or exceed inflation.
How Inflation Affects Investors
Inflation reduces the actual value of your money. For instance, if inflation is at 3%, something that costs $100 today will cost $103 next year. If your income doesn’t increase at the same rate, this will reduce your purchasing power for next year.
Because of this, investors need to look for assets that will increase in value or produce income faster than the inflation rate. Now, let’s explore the best inflation hedge investments to ensure your wealth remains protected.
1. Gold, Precious Metals, and Commodities
One of the most popular and historically reliable hedge against inflation examples is gold. For centuries, gold has been a popular choice among investors, especially during rising inflation, because its value tends to increase when the purchasing power of paper currency falls.
Since 1979, the purchasing power of the US dollar has fallen by 78%. Meanwhile, the price of an ounce of gold has increased by almost 937% and is still reaching record highs as inflation stays at or over its long-term average level.
Why Is Gold a Hedge Against Inflation?
The limited supply of gold and lack of ties to any particular currency prevent it from losing value as real currency does when central banks print more money. Furthermore, during uncertain economic times, there is an increased demand for gold, often driving the price of precious metals.
How to Invest in Gold:
- Physical Gold: You can invest in gold bars, coins, or jewelry. You can hold onto these tangible assets, but they need to be stored safely.
- Gold ETFs: Exchange-traded funds (ETFs) are another way to invest in gold without storing it. These exchangeable funds track the price of gold and can be traded on the stock market.
- Gold Mining Stocks: You can also invest in companies that mine gold to gain exposure to this commodity.
Gold is a good store of value and one of the best inflation hedge options available, even if it doesn’t generate income. Other tangible assets include commodities like oil, steel, and lumber. Their prices increase with inflation and serve as indicators of future inflation and economic growth.
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2. Stocks
Stocks in some industries can serve as a hedge against inflation, even if they might be highly unpredictable. Companies raising prices without losing customers tend to perform well during inflation. These companies are often in industries like utilities, consumer goods, and healthcare, where demand remains stable even as prices increase.
Best Inflation Hedge Stocks
- Consumer Staples: Companies that sell essential goods like food, beverages, and household items tend to perform well during inflation.
- Energy: Energy companies can profit from rising oil and gas prices, which makes them a good inflation hedge.
- Technology: Tech companies with high potential for growth and low capital expenditures may do well, even though they are not typically thought of as inflation hedges.
Stocks can be one of the best inflation hedge investments for long-term growth, mainly if you focus on companies with solid pricing power.
3. Real Estate
Real estate is another effective hedge against inflation, especially in the long term. Investments in real estate usually appreciate over time, and rental income from these properties often increases in line with inflation, giving investors a steady stream of income.
Ways to Invest in Real Estate
- Direct Ownership: Buying residential or commercial property can yield both rental income and appreciation in value.
- Fixed-Rate Mortgages: Fixed-rate mortgages allow homeowners to lock in low borrowing costs before inflation drives rates higher.
- Real Estate Investment Trusts (REITs): With REITs, you can invest in real estate without buying property directly.
- Rental Properties: Owning rental properties provides monthly cash flow and the opportunity for long-term appreciation.
As one of the best inflation hedges, real estate offers both passive income and potential capital gains, making it a robust investment strategy.
4. Cryptocurrencies
Alternative stores of value exist if you want to diversify from paper currencies. Cryptocurrency is one innovative asset class that includes digital assets like Bitcoin, Ethereum, and Cardano.
Some have questioned the reliability of cryptocurrencies as inflation hedges. However, the all-time highs in early 2024 demonstrated that the emerging concept of decentralized monetary value storage and a price rebound contributed to the rebirth of cryptocurrencies.
Investing in Crypto
US investors can join the crypto train by owning coins directly or buying shares in crypto trusts. Some of the ones available include:
- Grayscale Bitcoin Trust (GBTC)
- Grayscale Ethereum Trust (ETHE)
- Bitwise Crypto Industry Innovators ETF (BITQ)
- iShares Bitcoin Trust ETF (IBIT)
- Fidelity Wise Origin Bitcoin ETF (FBTC) and many more.
Ensure you do your due diligence before investing in these cryptocurrencies.
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5. Bonds, including Treasury Inflation-Protected Securities (TIPS)
Treasury Inflation-Protected Securities (TIPS) are a great option for risk-averse investors searching for the best inflation hedge for the long term. These U.S. government bonds are indexed to inflation, so if inflation goes up (or down), the effective interest rate paid on TIPS will too.
TIPS bonds are issued with maturities of 5, 10, and 30 years, and they pay interest every six months. They rank among the safest investments in the world because they’re backed by the U.S. federal government (like other government debt).
How to Invest in TIPS
- Direct Purchase: You can buy TIPS directly from the U.S. Treasury using TreasuryDirect.gov.
- TIPS ETFs: TIPS ETFs let you invest in a TIPS portfolio without having to buy individual bonds, just like gold ETFs do.
- TIPS Mutual Funds: These funds invest in a mix of TIPS and offer an easy way to gain diversified exposure to inflation-protected securities.
How to Hedge Against Inflation: Strategies to Protect Your Wealth
The following are key strategies that can help you protect your investment portfolio from the effects of inflation. They include:
- Diversification: Spread your investments over a number of inflation-hedging assets to reduce risk and increase possible returns.
- Long-Term Focus: Although stocks and real estate are among the most unpredictable investments, they typically appreciate over time and provide insurance against inflation.
- Regular Rebalancing: Review your portfolio regularly and adjust your holdings to ensure you maintain a balance of investments that are protected against inflation.
Additionally, investing in assets like high-yield savings accounts can offer stability, better returns, and long-term benefits. Applying all of these strategies will better equip you to handle rising inflation and protect your financial future.