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At Time of Inflation, Learn To Protect Your Wealth

by Estalontech 4 months ago in personal finance
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Hedging: look for assets that rise with inflation

Photo Frm UnSplash.com

The world’s major economies are breeding inflation. Figuring out how to protect your wealth is no small thing.

With an economy bursting at the seams, it’s crucial to figure out whether inflation will be good or bad for you. Excess money in the banking system has pushed up prices, leading to higher wages and other prices.

All too quickly, the 1% could find pennies lacking the purchasing power they once had.

“This is undesirable for all of us, because without any growth, the only way to maintain our standard of living is by tucking away more earnings,” writes A.Roth in his blog ?

We need Prepare Now !

The difference between deflation and inflation lies in cost of goods sold, not cost of everything sold.To protect against the loss of purchasing power due to inflation, investors look for assets that rise with inflation. These assets include gold, stocks, real estate and, more recently, bitcoin. Assets purchased to protect wealth from rising inflation are called “inflation hedges” and are part of many individuals’ portfolios for many reasons.

Gold

Gold has a long history of price stability and has proven resilient during economic downturns. In addition, gold is praised for its sound monetary characteristics, including its scarcity, cost of production (i.e., its hard- to-build-up inventory), longevity, divisibility, and fungibility — making it an attractive store of value and a “safe haven.”

Thus, during the high inflation of during the Carter administrations, gold bullion fared better than virtually all other assets. Experts believe that the former administration before Carter took over , nearly destroyed the U.S. economy through his inadequate attempts to combat mild inflation with wage and price controls and to repeal the U.S. gold standard. By the end of his term, inflation was in double digits and the price of gold had risen 350% since the beginning of his first term . Could we be witnessing the same scenario , as we now kick off Year 2022 with a inflation report shows 7 % , at its highest since the days of Carter administration

During that time, the Fed authority sought to end double-digit inflation by raising the federal funds rate to unprecedented levels. This extended period of extremely high interest rates is known today as the “Volcker Shock” and was the suspected cause of the 1981 recession ,when the price of gold rose 148% as people flocked to the safe haven to protect their assets.

Between major economic downturns, gold prices have historically tended to fall before consolidating and then rising again as the next economic downturn loomed. then and Now is different , as the Next financial revolution might just be begining , with the the involvement from Bitcoin , in this digital era of emerging technologies

Bitcoin

Bitcoin is often referred to as digital gold because the underlying computer code ensures many of the same properties of gold. Like gold, Bitcoin is extremely scarce, inflation resistant, divisible, durable, and highly fungible. Bitcoin is touted as an inflation hedge because it is not subject to the uncertainty of a central bank’s monetary policy. Instead, Bitcoin’s inventor, Satoshi Nakamoto, set the timetable for supply inflation when he created the cryptocurrency fund.

Moreover, it appears that “smart money” has been buying up Bitcoin in droves since late last year, including MicroStrategy’s Michael Saylor ( they bought even more in 2021, and Tesla’s E. Musk . These and other billionaires have added billions of dollars worth of Bitcoin to their companies’ treasury reserves and personal investment portfolios as a hedge against the threat of inflation even while most institutions and reputable investors have historically stayed away from investing in bitcoin, claiming it is a risky and speculative investment.

Although bitcoin was never really been hedge against inflation prior to the COVID -19 pandemic, its rapidly growing reputation — evidenced by “smart money” buying into the asset — will likely solidify its place as one of the best inflation hedges for the foreseeable future.

Stocks & Bonds

The relationship between inflation and stock prices is not uniform, as stocks and the companies that issue them differ. While each stock should be evaluated on its own merits, many believe that value stocks (i.e., stocks that are valued lower relative to company fundamentals such as dividends, earnings, or sales) outperform growth stocks (i.e., stocks that are expected to outperform the market) when inflation is high.

This theory is based on investors valuing growth stocks based on their present value of future earnings. If inflation or interest rates rise faster than expected, the current value of future cash flows is reduced. Stocks that can defend high dividend payments, including many value stocks, are likely to outperform because their yields are relatively attractive.

Stocks can increase in value with inflation because it can spur job growth, because investors can try to hedge by converting cash into stocks, and because earnings rise with inflation after a period of adjustment.

When inflation happens, investors may find it difficult to maintain the purchasing power of their savings, so they may sell off their cash and buy stock instead. In addition, companies may struggle to meet demand with the same level of output, so their revenues could increase with inflation, after a period

Consumer spending during an economic slowdown can also have negative effects on stocks. When there are declines in consumer spending, companies may not be able to increase their revenues or pass on costs to customers as quickly as expected, which can lead to falling profit margins. Furthermore, increasing input costs (cost-push inflation) can decrease profit margins and force companies to falter as it takes companies several quarters to pass along cost

Real Estate

Using the stock market to protect against inflation is another popular strategy because the stock market tends to rise with the cost of rent. Higher rental costs are caused by inflation, and higher interest rates will force investors to demand higher prices for their properties. This positive feedback loop acts as a tailwind for landlords.

Nevertheless, real estate prices don’t always rise when inflation is high. This is true because rental income generally increases less than inflation. If interest rates increase, then capitalization rates increase, which means that there is a less likelihood that real estate property prices will increase. According to analyst , only retail property income historically keeps up with inflation. In contrast, industrial and apartment incomes have not kept pace with inflation. Office property income has barely increased if at all.

The effect of inflation on real estate is that it depresses values of commercial properties, as retail properties are better at providing an inflation hedge. It is difficult to measure the effect of inflation on industrial properties, but it does provide a nearly complete inflation hedge. Office properties are only a partial inflation hedge

Inflation-Linked Bonds

An inflation-linked bond is a bond whose price increases along with inflation. Like regular bonds, inflation-linked bonds increase in value if the inflation rate rises. However, unlike regular bonds, inflation-linked bonds will never go below the amount they were originally issued. This is because inflation will eventually decrease the purchasing power of the bonds.

These securities often provide lower yields than Treasuries during periods of unexpectedly high inflation. One example of this is after the 2008 financial crisis, inflation was high and many countries issued inflation-adjusted bonds such as India, Canada, and the United States.

We already hinted that there are many people who don’t understand the financial phenomenon called inflation. For some people it is a financial “tailwind” that gives them money and opportunities while for others it is a “painfully relentless wealth destroyer.”

On the surface to politician , Inflation can be a financial windfall for businesses, individuals, ruling parties and governments who seek trillion in infrastructure grants or they called it as economy booster . The downside of inflation is that it destroys wealth for many common folks

Government leaders in the past have tried to control inflation by using various economic policies to raise interest rates and limit the amount of money they make available to the public. But if they do not maintain control over inflation, this could lead to other unforeseen problems.

These policies may not be effective at this time period in comparions to early eighties , and they may inflict problems. Because government officials seem to have a natural tendency to push inflation to excessively high levels, whil;e business people have come to learn how to store their wealth to protect themselves against high inflation.

While gold, real estate, inflation-adjusted bonds, and certain stocks have proven useful hedges against inflation, bitcoin and cryptocurrencies have been attracting interest among financial institutions and many billionaires

Everybody are now questioning how to protect one’s wealth in today’s modern economy.

By knowing the different methods that inflation affects and the tools you can use against monetary policies, you can be better off financially.

#Disclaimer Note : This publication is not intended for use as a source of any financial , money making legal, medical or accounting advice. The information contained in this guide may be subject to laws in the United States and other jurisdictions. We suggest carefully reading the necessary terms of the services/products used before applying it to any activity which is, or may be, regulated. We do not assume any responsibility for what you choose to do with this information. This article is not meant for financial advice , Use with your own judgment.

personal finance

About the author

Estalontech

Estalontech is an Indie publisher with over 400 Book titles on Amazon KDP.Being a Publisher , it is normal for us to co author some of our publications with brainstorm on interesting contents which we will like to share on this paltform

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