Investing in times of high inflation

A question from Askville:

What investments are best during times of inflation?

It usually takes a while for the herd to shift directions (though I’m sure that many are betting on inflation already). What are the best areas to move money to when inflation is ready to accelerate?

Economists say inflation comes in two flavors, demand-pull (as in “government spending exceeds tax revenues” or “wages increase faster than productivity”) and cost-push (as in “oil prices doubled over the last three years”).

Demand-pull inflation is likely to be limited to one country at a time, so reallocating some of your investments to foreign countries may be a prudent choice. Sooner or later, your home currency will depreciate relative to foreign currencies, so your foreign investments should appreciate in terms of your home currency.

Cost-push inflation, on the other hand, can be global or nearly global. If, for example, oil is expensive, it is expensive for everyone. So you must identify some opportunities that perform well in spite (or due to) the source of this high cost-push inflation. Let’s stick with oil prices for example. You could consider oil royalty trusts (there are quite a few publicly trading ones), oil futures, or anything that’s based in Norway, which is about the only country that is a major oil exporter, has decent investor protection in place, and has financial markets open to foreign investors (Russia, Nigeria, and Venezuela are to a different degree short on investor protection, while Saudi Arabia does not allow foreign investment at all).

Regardless of the type of inflation, you can still buy an apartment building, if you can find an attractively priced one (meaning one whose operating yield comfortably exceeds the interest rate used to finance its purchase). Or you could recall that inflation puts upward pressure on interest rates and go short some bond futures…

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