Buy Commodities For Inflation Protection

The economic landscape of the world is constantly changing. It’s important to know what assets hold near and long term value in order to take advantage of these changes – and to profit from them.

The dollar has acted as the world currency for several decades. However, like anything else in life, all good things must come to an end. While the dollar losing its strength is a bad thing for most people, there is a way to make sure it’s not a bad thing for you: buy commodities.

With Ben Bernanke printing money at unprecedented rates, the dollar is very likely to lose its value relative to other currencies. This is why countries like China, Russia, and Brazil are slowly moving out of the dollar. They won’t do it fast because they don’t want the global economy to panic, which would only hurt them. They’re looking for a smooth transition.

If the dollar does fail, commodities will likely increase in price across the board. Commodities are real – as in items that have a limited supply. This includes gold, silver, copper, grains, oil, coal, and natural gas.  Those who buy commodities with even a small portion of their portfolio (and I recommend investing only a small portion:  10-15% at most, in this asset class) will be glad they did in such a scenario.

The problem is that the Fed seems to be basing their decisions on what took place during The Great Depression, when circumstances were much different. They fear deflation and seem to want to avoid it at all costs. Deflation would lead to decreased prices everywhere, including commodities.  I agree that deflation is the bigger enemy here, but believe the chances of out-of-control deflation are a small fraction of the chances of high inflation.  Thus, I think Bernanke should become more of an inflation hawk going forward.

Based on Bernanke’s habits, he will very likely choose the other approach, which will be to print more money and inflate our way out. While this approach might work, it stands the risk of causing hyperinflation, or at least very high inflation rates. The good news is that if inflation takes off, commodities funds are likely to see substantial gains, which should help mitigate the damage somewhat.