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Period of inflation and disinflation take turns in a secular (main) trend every 20 years (approximately).  During period of inflation, certain asset classes and businesses do better while others do worst or not as good.

During inflationary cycles, the main theme is that present prices are cheaper than future prices. Key points to remember during inflationary periods is that inflation creates extreme emotions in the public.  A lot more than disinflation which by definition is lowering in prices).  The public does get agitated during inflationary period.  It is not uncommon to have major riots and even wars during inflationary periods.

Gold is the best hedge against inflation.  It tends to hold constant during inflationary period.  (Gold over centuries is the constant means of value).  However, Gold is not the best investment.  It only preserves value.

Silver on the other hand goes hand in hand with Gold and traditionally Silver outperforms Gold in return performance.  In addition Silver is an industrial metal a lot more than Gold.  However Silver is also more volatile meaning that prices would be over sold above reason and thus more subject to speculative forces with wild swings. A good tool to use is the Gold/Silver ratio.  This ratio over centuries has averaged 1:15 (gold:silver).  However the ratio has tendencies to increase.  In recent times (2009), the Ratio peaks.  And prior to that in 1991 and 2003.  Notice that from 1981 to 1999, prices were mostly disinflationary.  In 1981, an extreme inflationary peak was achieved and in 1999 the extreme disinflationary peak was achieved, in both cases signaling the change in the secular trend.  (For further study refer to interest rate charts from the period of 1960 to 1981 (82) and then from 1981 to 2000 and you will clearly see the peaks and trends).

And a more historical view of the Gold/Silver Ratio (1835) showing a peak in 1939 and 1991.

And from 1340’s to 2010.  Here in we see that a reasonable level for the ratio is 20.

For more information on Gold and Silver, please refer to the Gold and Silver pages.

Aside from Gold being the best stable hedge against inflation, the best performing assets to invest in are:

Commodities and especially commodities tied to key living such as oil, copper, uranium and cocoa.  Of the entire group, oil is the most important since it has an effect on all others.

  • Oil is used in modern transportation and industrially. It’s byproducts are used for fertilizers thus affects food and agriculture.
  • Copper has been used for thousand years and now used widely as an industrial metal. The major applications of copper are in electrical wires (60%), roofing and plumbing (20%) and industrial machinery (15%).
  • Uranium is used mostly for nuclear power and ammunition (metal piercing ammo).  In less quantities, is used for X-ray equipment and also for certain coloring of glass ornaments.  The rational for Uranium investment in this cycle is indirect partly due to increase war tendencies.
  • Cocoa

Commodities are further classified for investment purposes as follows:  Energies, Grains, Softs, Meat and Financials.  Of these Financial commodities is listed here only for completeness purposes.  As discussed above they may not be suitable part for this inflationary cycle because in this entire inflationary cycle, hard assets are key investments and financials by definition are NOT hard assets (they are speculative assets).

  • Energies:  Materials and products that provide energy to heat and power homes as well as businesses. This includes petroleum, byproducts of petroleum, crude oil, heating oil, propane, natural gas and even coal.
  • Grains:  This includes wheat, oat, corn, rice and soybean. It can also include a lot of other various agricultural products.
  • Softs: Softs include agriculturals such as coffee, cocoa, sugar, cotton and orange juice. The most common exchange for these commodities is the Coffee, Sugar and Cocoa Exchange. Of recent times, the Dalian (China) Commodity Exchanges has established the 2nd largest exchange of agricultural commodities in the world.
  • Meat: This includes live cattle, pork bellies and lean hogs.  A lot of times this particular commodity type is dependent upon grain as well, since the grain feeds most of the livestock.
  • Financials:  This type is mentioned here because most trade in futures or options, instead of the actual goods. This means financial commodities are often listed on the same exchanges. This includes United States Treasury Bonds and can be found on the CBOT as well as the S&P 500

Of the above, it must be mentioned that Commodities today can be invested by holding the physical commodity (Spot market) or by trading for speculative purposes (Futures Trading).  In this discussion, we are emphasizing holding hard assets.

Another good asset to hold in this period is Real Estate.

Real estate over history follows demographics and assuming that we follow were people are and will be, real estate as an asset is a good investment in these periods.  Real Estate has been tested over long history to yield an average of 7% per year.

Home Prices 1961 - 2000

Of least interest to hold and subject to whip lashes are investment into speculative stock.  However, it is not to say that stock equity prices will not appreciate as they likely appreciate in inverse proportion to the devalued currency.  Stock investment in dividend yielding stock (yield must be better or equal to the 10 year Note) purchased during significant drops  would be suitable investments in stocks. Here is a chart that shows what happened during the last recent Secular inflationary cycle of 1960 – 1982.  Notice during inflationary periods company P/E tend to be lower if not lowest.

The least worst to hold during inflationary times is Cash in the bank as it depreciates proportionately to the rate of inflation.  Returns after considering taxes (which tend to also increase in inflationary times), result in a negative return scenario for cash on bank.

Here is a historical graph to keep in mind at all times.

A side note from the above Chart, since inflation data is very hard to come by.  The above graph shows a close correlation between interest rates and inflation rates.  For such purpose, plotting interest rates would be similar to plotting inflation rates.  The key interest rate is the 10 year note.  10 year is the time period where most institutions consider to be critical.  Making a decision to last 10 years would be considered an important decision.