Searching For A Hedge? It’s Not That Difficult

TruePoint Capital

Inflation is on everyone’s minds. After hitting a 40-year high in December, inflation is now everyone’s concern. Rising prices without rising income mean eroding buying power. With a shrinking dollar and no end in sight, investors are scrambling for a hedge to counter the ill effects of inflation.

Gold is always discussed in the shadow of inflation, but lately, crypto is also receiving attention.

Gold is a popular hedge but is it of any use against inflation if you hang onto it? After inflation subsides, so will the price of gold, so what purpose has it served? A true inflation hedge will help you maintain your lifestyle by generating income that keeps pace with inflation.

Gold is not a productive asset. It does nothing – not even as a form of currency. It just sits on the shelf. It may appreciate during inflationary times but drops when prices spring back to normal. That’s assuming gold prices remain stable. The truth is, gold prices can be just as volatile, or even more volatile, than stocks. After hitting a record high in 2011, the price of gold bottomed out by 2014 after shedding more than 40% from the high.

What about crypto?

I can’t believe we’re even having this conversation. First of all, crypto is entirely useless as a currency. Second, I’m not sure what crypto does other than trade based on novelty. Since hitting its 2021 high of $67,583 in November, the price of Bitcoin has since shed nearly 50% of its value, where it sits at $36,808. This all happened when inflation hit the highest level in 40 years.

Does that sound like an ideal hedge? Anybody who held onto Bitcoin – or any other forms of crypto for that matter – in hopes of finding shelter from the inflation storm was sorely disappointed.

Gold and Bitcoin are too volatile and unreliable to be effective inflation hedges. Even more so than volatility, they fail in the one aspect every investor should insist on for hedging against inflation – INCOME. Wages don’t keep pace with inflation, so what kind of income does? Passive income. Unless your portfolio is generating passive income from inflation-insulated assets, you are powerless to watch your savings and reserves being depleted before your eyes.

So, what assets are inflation-proof? The answer is right under our noses. It’s been there all the time. We have to look at the headlines to find the ideal inflation hedge. And no mention of rising prices will escape mentions of rising prices of food, gasoline, clothing, and housing. Wouldn’t it make sense then to invest in assets whose prices or cash flow rise with inflation?

Why is real estate an ideal inflation hedge?

Sophisticated investors have long favored real estate for its hedging qualities and because of its non-correlation to the stock market.

Among all the talk of inflation is rising rents. Multifamily housing is ideal for adapting to rising prices with relatively short-term leases because of staggered lease renewals that can incorporate higher rents.

Searching for an inflation hedge?

You won’t find it in gold or crypto. Besides the price volatility, neither asset produces income that correlates with inflation. But, there is an asset that checks all the boxes. Besides correlating value over time with inflation, real estate rents – particularly in the non-luxury market – keep pace with inflation. This all makes real estate an ideal hedge.