Hard Assets for Hard Choices

Every culture has its own particular boogeyman. In the folklore of Alpine countries, Krampus punishes children during the Christmas season who have misbehaved. He’s the dark doppelganger of kindly Saint Nicholas.

In Germany, the Butzemann (“he who makes a racket”) is a faceless goblin shrouded in a cloak. In Spain, the Hombre del Saco (“sack man”) kidnaps naughty children and carries them away in a sack. The list of the world’s monsters goes on.

On Wall Street, the boogeyman is inflation. And he has escaped from his cage.

The U.S. Bureau of Labor Statistics reported Wednesday that inflation in the U.S., as measured by the consumer price index (CPI), jumped to 6.2% on a year-over-year basis in October from 5.4% in September. This reading far exceeds the consensus expectation of 5.3% and represents the largest annual increase in more than 30 years.

The annual core CPI, which excludes volatile food and energy prices, rose to 4.6% in the same period, compared to the expectation of 4%. On a monthly basis, the CPI and the core CPI came in at 0.9% and 0.6%, respectively (see chart).

The Federal Reserve has been arguing that inflation surges have been “transitory” and Wall Street has generally agreed, but lately investors aren’t so sure. The Fed may be compelled to tighten faster and sooner than expected.

Since the outbreak of the coronavirus pandemic, the Fed has pumped billions upon billions of dollars into the economy to ensure the solvency of the U.S. financial system. Between the glut of dollars and the astronomically high national debt, the national currency will inevitably lose ground as inflation expectations rise.

These concerns, coupled with the strong global economic recovery (especially in Asian economies) have bolstered the prices of hard assets.

Hard assets are commodities such as energy, precious metals (e.g., gold and silver), raw materials (e.g., copper and iron ore), agriculture, and forest products. They are tangible assets with intrinsic value.

Now is an excellent time to expand your stake in hard assets, as an integral part of a properly balanced portfolio. Inflation is posing hard choices for investors. Hard assets are part of the answer.

Watch This Video: Inflation Hedges Are Gaining in Popularity

Although a diversified investment strategy reduces the risk of overexposure to a particular industry or sector, be aware that you lose some of that advantage if your commodities positions account for more than 5% to 10% of your holdings.

Extremely sensitive to rising prices, hard assets make excellent inflation hedges. Here are two funds to consider: one a play on agriculture, the other on gold.

A hungry world…

Several studies show that population growth is outpacing food production. You can leverage the global food shortage and simultaneously hedge your portfolio against rising inflation, by placing the Invesco DB Agriculture Fund (DBA) in your portfolio’s hedges sleeve.

A pure play on basic food products, DBA is an exchange-traded fund (ETF) that holds futures contracts on such agricultural commodities as corn, wheat, soybeans, cocoa, coffee, sugar, and cotton. These contracts are rolled over before expiration to maintain exposure.

Since the coronavirus outbreak last year, the cost of all of those commodities has risen, thanks to supply chain disruptions, severe weather events such as droughts and floods, and political disturbances.

With a net asset value of $868.3 million, DBA is considered a benchmark for the agricultural sector and its expense ratio is a reasonable 0.85%. Commodities in general represent fast-moving investments, and as such deliver the potential for market-beating gains.

The golden road…

If you’re risk averse and want an easy and safe way to increase your exposure to the Midas Metal, consider the SPDR Gold Trust (GLD).

Launched in 2004, the SPDR Gold Trust was the first gold ETF available in the U.S. GLD seeks to replicate the performance, net of expenses, of the price of gold bullion. GLD is considered the benchmark for the yellow metal.

With net assets of $59.2 billion and an expense ratio of only 0.40%, the SPDR Gold Trust is the most popular bullion ETF and the most liquid physically backed gold offering available. The SPDR Gold Trust is backed by physical gold and mirrors the price movements of the precious metal. When gold prices are on the way up, as they are today, the biggest profits will come from plays that tag along for the ride.

Gold ETFs hold bullion as their only asset but trade just like regular stocks. They move directly in tandem with gold prices.

The value of gold tends to increase as the purchasing power of the dollar declines. The price of gold has been on a tear this year and our investment team predicts that the precious metal will continue its ascent into the foreseeable future.

If you’re willing to shoulder more risk than an ETF, our team has pinpointed a small-cap gold mining stock that’s poised for exponential gains. For details on this under-the-radar gold play, click here.

John Persinos is the editorial director of Investing Daily. Subscribe to his video channel.