Safe haven in the depot: is gold the best choice for inflation protection? | 06/05/21

• Gold as a traditional safe haven

• Real assets also serve to protect against inflation
• With raw materials against the loss of purchasing power

Not only since the central banks flooded the markets with money to cushion the consequences of the COVID-19 pandemic, concerns about inflation have been booming among investors. The fear of monetary devaluation drives many investors in gold, especially in economically uncertain times – because the precious metal cannot – like fiat currencies – be devalued by monetary policy measures: a complete loss in value of gold is almost impossible. The fact that the precious metal, as a natural raw material, is limited in its quantity, supports the properties attributed to gold, maintaining value and protecting against inflation. The precious metal also plays a leading role for many market participants as an instrument for hedging against currency crises.

But although gold’s relatively constant purchasing power prompts many investors to diversify their portfolios with gold, there are other ways of minimizing the risk of inflation.

With stocks against inflation

For many investors, equity investments are the method of choice when it comes to hedging against inflation. Achieving value retention requires a return of around two percent per year – at least recently, this performance was easy to achieve with the right selection of stocks. However, investors in the stock market have to take fluctuations into account: In weak stock market years, maintaining value with pure stock portfolios can be problematic.

The right choice of stocks is a prerequisite for a positive return on the stock market. If companies whose shares are in their own custody account can pass on an inflation-related cost increase, shareholders are even beneficiaries of inflation. In addition to the targeted selection of stock values ​​and the corresponding diversification in your own portfolio, it is the time horizon in particular that can play into the hands of stock investors when hedging against inflation: the longer you hold stocks, the more likely it is that fluctuations in the meantime will be balanced out and ultimately achieve a positive return becomes. Various studies show that stocks are one of the most profitable investments in the long term.

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In order to achieve a broad diversification of the portfolio and thus better protection against inflation, ETFs are also worth a look. Index ETFs have enjoyed great popularity in recent years, as they are considered a cost-effective way of profiting from the broad market.

However, anyone who uses stocks to protect against inflation should also be aware of the risks: If inflation rises not only moderately but at a high rate, equity investments can suffer on a broad front, regardless of how well diversified the portfolio is. A very high rate of inflation can have an impact on the entire economy and thus also on stocks as an asset class in general. Here, too, it is worth thinking long-term: the longer the investment approach, the greater the chance of compensating for the losses and generating a positive return.

Dividendenaktien

Anyone who primarily wants to hedge against the risk of inflation with stocks is advised to take a closer look at established dividend payers, because so-called dividend aristocrats have done well in the past even in weak stock market times. Even the corona pandemic, during which many companies had to cut their distributions to shareholders, did little to harm the elite among dividend stocks.

Anyone who specifically relies on reliable dividend payers and researches which companies have at least been able to keep their distributions to shareholders stable even in times of crisis, can achieve inflation protection through a share portfolio regardless of the development on the stock market. Some companies have been paying reliable dividends for more than 100 years, others convince by continuously increasing their payout.

Protection against inflation through real estate?

Experts repeatedly mention tangible assets such as real estate as an option to protect one’s own assets against a decline in value. Because real estate usually increases in price when it comes to a devaluation of money. This becomes particularly clear with regard to financed properties: if inflation rises, the amount of debt remains the same, but these are worth less due to the inflation – if the value of the financed property increases at the same time, property owners benefit twice in the event of a rise in inflation.

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But real estate owners do not always cheat inflation: if you act as a landlord, you have to cope with rising costs when inflation rises, for example when repairs, renovations or refurbishments are due. On the other hand, the rental income is worth less than before. In these cases, property owners are only protected against inflation, despite a possible increase in property value, if the additional costs – for example in the form of rent increases – can be passed on to the tenants.

REITs

Nevertheless, there is a way to protect your own money from inflation through real estate: through an investment in a Real Estate Investment Trust (REIT). Anyone who invests in a REIT invests in real estate and benefits from regular rental income, but without being solely responsible for the costs incurred with the real estate. Depending on the REIT’s business model, these can be residential or commercial real estate, which under certain circumstances can ensure long-term value stability.

In addition, REITs have another advantage for investors: They regularly pay dividends, which investors can use to compensate for inflation.

According to studies, REITs do well in inflationary low-interest markets and deliver stable returns, so they are definitely worth a look as an inflation protection for your own portfolio. Investors should, however, take a close look at the respective business model, because the real estate portfolio in particular should be carefully examined. While residential real estate and storage space will probably continue to be in high demand in the medium to long term, there is currently a decline in demand for office real estate and the increasing trend towards mobile working and home office.

Commodities as protection against inflation

Experts also repeatedly bring up commodity investments when it comes to protecting investor assets from inflation.

With the recovery of the global economy after the sharp slump as a result of the corona pandemic, industrial production will pick up again and thus the demand for raw materials is also expected to rise. The energy sector in particular – and especially the market for renewable energies – could be of interest to investors in this context.

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The strong demand for industrial or energy raw materials will ensure rising raw material prices – in the past this has triggered inflationary tendencies. Higher raw material prices have driven inflation and provided a surge in inflation. In line with this tendency, raw materials make sense to hedge against inflation, especially when the raw materials are in high demand and urgently needed.

In this context, however, investors must note that commodity prices are subject to fluctuations. There can be volatile developments in energy prices in particular.

Cryptocurrencies – more risk than benefit?

In recent years, cryptocurrencies have also gained a reputation as a possible hedging instrument against loss of purchasing power. Because unlike fiat currencies, cyber currencies such as Bitcoin and Ethereum are inflation-proof, as they are independent of central banks and monetary policy interventions. At the same time, for example, with the world’s largest crypto currency Bitcoin – similar to gold – the quantity limit acts as a protection against inflation, unlike fiat currencies, crypto money cannot be recreated indefinitely.

But the enormous volatility on the crypto market makes digital currencies also a deposit risk at the same time. Although the inflows into Bitcoin & Co. have been increasing for some time, experts warn of the risk of loss that comes with crypto investments. The market is unregulated and there are no instruments to maintain price stability.

Diversification in all areas

Regardless of which assets investors use to make their portfolio inflation-proof: a broad list is important in every area. Many experts recommend diversifying investments into different asset classes.

Those who commit themselves to a certain asset class should also diversify their investments broadly and, for example, rely on different industries or countries for dividend stocks, not only hope for the self-rented home for real estate and also avoid a focus on a certain commodity when investing in commodities.

Those who position themselves broadly may not be able to completely decouple themselves from inflationary trends, but they can mitigate the consequences and help secure purchasing power.

Finanzen.at editors

Image source: Jag_cz / Shutterstock.com, Jag cz / Shutterstock.com, canbedone / Shutterstock.com, MichaelJayBerlin / Shutterstock.com

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