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June 05 2018

moneymetals

How Savvy Investors Do (and Don’t) Hedge against Inflation

Inflation is a corrosive force that gradually – and sometimes rapidly – eats away at the nominal value of savings and investments.

It is perhaps the biggest threat looming on the horizon for millions of retirees who have been steered into assets marketed as “conservative” – such as dollar-denominated money market accounts, bonds, and annuities.

Inflation silently robbing you of purchasing power since 1913

According to the Aegon Retirement Readiness Survey 2018, an alarmingly large proportion of the population doesn’t understand basic financial concepts such as inflation.

Consider this question from the survey: “Imagine that the interest rate on your savings account was 1 percent per year and inflation was 2 percent per year. After 1 year, how much would you be able to buy with the money in this account?”

The question is actually even easier to answer than it first appears. To get it right you only have to select among a list of possible choices that includes “less than today,” “more than today,” and “the same as today.”

Obviously, if inflation is running at 2% a year, then a 1% yield on your savings is neither growing nor preserving your purchasing power. The correct answer is “less than today.”

That may be obvious to you. But it’s not to everyone.

Among U.S. respondents, only 55% answered the inflation question correctly!

A score of “55” is equivalent to an “F” – as a nation, we are outright failing to grasp the basic concept of how inflation negatively affects savings.

Widespread public ignorance about inflation works, perversely, to the advantage of governments, central banks, commercial banks, and peddlers of fee-laden, inflation-lagging financial products such as fixed annuities.

Investors who are savvy about the inflation threat know that conventional annuities, bonds, and savings accounts are all vulnerable to losing value in real terms.

But those seeking protection from inflation can still run into trouble by venturing into flawed "inflation hedges."

Think twice before sinking money into the following assets…



May 29 2018

moneymetals

David Smith: Debilitating Inflation Is Like an Army of Termites Eating Away Your House

Well now, without further delay, let’s get right to this week’s exclusive interview.

David smith

Mike Gleason: It is my privilege now to welcome back David Smith, Senior Analyst at The Morgan Report, and regular contributor to MoneyMetals.com.

David, thanks for joining us again, how are you?

David Smith: You bet, Mike. It's great to speak with you again.

Mike Gleason: Well David, we published an article you wrote on inflation this week on our MoneyMetals.com website, and it's really great, by the way, and I hope everyone listening will take a few minutes to read it, because the subject matter, that being inflation, is very timely.

Right now, metals are suffering because of a rally in the U.S. dollar. There's lots of talk on Wall Street about how well the dollar's performing over the past few weeks, but traders, of course, are focusing exclusively on the dollar's exchange rate with other world currencies. You and I know that isn't really what matters. What counts is not how many euros or yen the dollar will purchase, it's how much gasoline, or housing, or food it will buy. And the reality is that it buys less of those things every year. We have inflation regardless of whether you define the term as an increase in the money supply, or as an increase in the price of goods and services.

However, precious metals have fallen in recent weeks simply because the dollar is stronger in foreign exchange markets. The fact that the dollar buys more yen is trumping the fact that the dollar buys less oil. It's as if we have deflation but the truth is, inflation is actually positive and starting to accelerate. So, what gives here, and how long do you think it will be before Wall Street figures out what is really happening to the dollar's value, David?

David Smith: Well, Mike, I think a lot of it has to do with Wall Street looking at the exchange rate because they're asking themselves what effect will it have on the profitability of companies that do business overseas or that import things and it has a significant effect on them if there's a change in the dollar's relation vis a vis to the currencies.

But the more immediate effect happens to the rest of us because we start paying more with inflation for things that we buy and sell on an everyday basis. So we're in a different universe from Wall Street in that regard. I don't know about you, but I've noticed the price of services going up substantially. Some prices have stayed the same for several years at the grocery store, beyond just the normal seasonal fluctuations of produce that you might expect to be more like avocados certain time of the year.

But a lot of other things, too, that normally have been pretty stable seem to have a built-in upward bias and all that does is to take more and more purchasing power out of our pockets, yours and mine, and the people listening to this, and place them someplace else. So, it's kind of a subterranean type of thing that's going on but it's not to the good for any of us.

Mike Gleason: Yeah certainly, well put and obviously the markets seem to be focusing very much on what it does relative to those other currencies and not really what it's buying, like you said right there. I mean everyone can attest to the fact that things are getting more expensive. There's no doubt about that.

As you have written, inflation is a destructive force for most of us. The powers that be have done a masterful job of painting a degree of inflation as somehow healthy for the economy, but you spend a lot of time traveling in South America, as you mentioned in this week's article. So you've seen firsthand what is happening in places like Argentina and I guess the government there has given up talking about how wonderful it is that money buys less every year. Obviously nobody there is going to be buying that line of bull anymore.

In Venezuela, people are starving, and violence is on the rise. Talk a bit if you would about what a rampant inflation looks like on the ground. You recently took another trip to South America. Tell us what it's like when confidence in the money begins to fail.


Read/Listen to the podcast here: (source
moneymetals

Inflation: The People's Enemy. The Government's Friend.

When you can lie about money, you can lie about anything. ~David Morgan

We can argue about the definition(s) of inflation until the cows come home - some economists spend a career trying to nail it down.

But for clarity's sake, we'll use the definition of the Austrian School (Mises.org) as an increase in the money supply. This is really the correct one, regardless of any bias of dogma, "schooling" or the mainstream media. Although most everyone defines inflation as an increase in the price of goods and services, this is actually a result.

Most of us have been taught that inflation is all right as long as it doesn't get out of control. In the short term, it can benefit those able to manage cash flow in business or with real estate for which they can service loan interest and taxes.

But over time, it's a safe bet that a period of rising prices will be detrimental to most of the population. Distortions in the economy increase to the point where it becomes almost impossible to determine the real price of anything.

How much demand is attributable to a desire for consumption, rather than a hedge against higher prices?

The truth of the matter is that inflation – at any level – is basically stealing! Things like an expanding money supply, increased "velocity," or rising prices due to demand-supply imbalance, add additional confusion.

Last year, well before the current destructive inflationary moon-shot in Venezuela caused literally hundreds of thousands of impoverished residents to flee into neighboring Brazil and Colombia, it was rumored that an ounce of silver could buy a several month's supply of food; an ounce of gold, a house. Imagine their purchasing power now!

Continue reading.. (source


February 23 2018

moneymetals

5 Big Drivers of Higher Inflation Rates Ahead

Investors got lulled into a state of inflation complacency. Persistently low official inflation rates in recent years depressed bond yields along with risk premiums on all financial assets.

That’s changing in 2018. Five drivers of higher inflation rates are now starting to kick in.

Inflation Driver #1: Rising CPI

The Consumer Price Index (CPI) is a notoriously flawed measure of inflation. It tends to understate real-world price increases. Nevertheless, CPI is the most widely followed measure of inflation. When it moves up, so do inflation expectations by investors.

On February 13th, the Labor Department released stronger than expected CPI numbers. Prices rose a robust 0.5% in January, with headline CPI coming in at 2.1% annualized (against expectations of 1.9%).

In response to the inflationary tailwinds, precious metals and natural resource stocks rallied strongly, while the struggling U.S. bond market took another hit.

Inflation Driver #2: Rising Interest Rates

interest rates

Since peaking in mid-2016, the bond market has been stair-stepping lower (meaning yields are moving higher). In February, key technical levels were breached as 30-year Treasury yields surged above 3%. Some analysts are now calling a new secular rise in interest rates to be underway after more than three decades of generally falling rates.

The last big surge in interest rates started in the mid 1970s and coincided with relentless “stagflation” and soaring precious metals prices. It wasn’t until interest rates hit double digit levels in the early 1980s that inflation was finally quelled and gold and silver markets tamed.

​Continue to the full article (source)
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