Hedge Your Portfolio Against Inflation with Gold, Crypto and Real Estate

As governments worldwide grapple with economic uncertainties, investors seek refuge in assets that can withstand the erosive forces of rising prices. Inflation, a persistent concern in recent years, erodes the purchasing power of traditional currencies. As central banks navigate the delicate balance of monetary policy, many are turning to time-tested stores of value like Gold, one of the quintessential portfolio hedges. Its enduring appeal in times of economic turmoil has earned it a reputation as a reliable hedge against inflation.

Meanwhile, the emergence of cryptocurrencies represents a paradigm shift in the financial realm. With their decentralized nature and sensitivity to market dynamics, they offer a dynamic defence against the rising tide of inflation. Cryptocurrencies have swiftly captured the attention of investors seeking alternatives to traditional assets.

Real estate, a stalwart in the world of investments, stands as a bastion against the corrosive effects of inflation. Its ability to generate stable rental income and adapt to changing economic conditions positions it as a resilient choice for safeguarding wealth.

As we navigate this complex financial terrain, understanding the role of these assets in hedging against inflation is paramount.

Gold

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Despite recent price fluctuations, gold remains a reliable hedge against inflation. Its historical consistency attests to its resilience over centuries, preserving purchasing power through economic upheavals. Gold has proven its strength even as inflation rates have risen.

Gold has faced scrutiny compared to safe havens like the US dollar and Treasurys. However, with indications that the Federal Reserve may not raise interest rates further as inflation stabilizes, gold’s appeal is resurging.

Should a 2023 recession materialize, gold could become a refuge for investors seeking protection against corporate earnings declines, potentially boosting gold prices.

Gold’s global demand is diverse, driven by factors such as jewellery markets in India and China, central bank reserve diversification, and investor interest in safe havens. This broad-based demand contributes to its liquidity and enduring appeal as a portfolio hedge.

Since the US left the gold standard in 1971, gold’s price has skyrocketed, adjusted for inflation. It has effectively preserved wealth, with its historical high in 1980 equivalent to over $3,000 per ounce today. Gold’s price volatility differs from industrial commodities like copper, responding to distinct factors. Its tangible nature provides security during crises, a feature not shared by digital assets.

Investors have various options for hedging against inflation, each with trade-offs. Physical gold requires storage but offers tangible security. Physically backed gold ETFs provide an alternative, while futures and options involve higher risk. Gold mining stocks present the potential for higher returns but carry industry-specific risks.

While short-term fluctuations occur, gold’s enduring value as a wealth store remains steadfast, offering investors a reliable means to preserve purchasing power in uncertain economic times.

Crypto

Source: 0pen / Shutterstock.com

Cryptocurrencies, relatively new to the world of finance, are gaining attention as potential hedges against inflation. Recent market fluctuations, influenced by various factors, suggest their role in combating rising inflation rates.

Cryptocurrencies often move inversely to the US dollar, with a notable correlation of 63% since May 2017, which has increased to 75% since May 2020. This inverse relationship underscores their sensitivity to changes in interest rates.

Quantitative easing (QE) significantly impacts cryptocurrency prices. During QE rounds, the crypto market has witnessed substantial surges, as seen in 2020 when Bitcoin appreciated by 540%. This highlights the strong connection between cryptocurrencies and liquidity induced by QE.

Market stress and volatility also affect crypto prices. The Financial Stress Index turned positive in 2020, causing a 40% drop in Bitcoin. Similar instances occurred in 2022 and 2023, continuing to impact stablecoins and overall crypto market volatility.

A robust correlation exists between global money supply (M2) and crypto performance, with a coefficient of 0.75 since 2017. Cryptocurrencies tend to thrive amid expanding money supply, especially during phases of loose monetary policy.

Cryptocurrencies gain traction in inflation-prone emerging markets to preserve purchasing power and offer attractive investment opportunities. Their decentralized nature provides advantages in portfolio hedges since they aren’t influenced by traditional economic factors but by market confidence, adoption, technology, and liquidity.

These quantifiable factors demonstrate cryptocurrencies’ potential as reliable hedges against inflation. Their inverse correlation with the U.S. dollar, responsiveness to QE and money supply, sensitivity to market stress, and adoption in inflation-prone markets position them as a compelling choice for asset preservation in a dynamic economic landscape.

Real Estate

Source: tokar / Shutterstock

Over the past few decades, while U.S. inflation has averaged around 2-3% annually, real estate investments have demonstrated an impressive average annual ROI of approximately 9-10%. This consistent appreciation highlights real estate’s reliability in protecting against inflation.

Real estate provides an effective defence against inflation through stable rental income, which can be adjusted to counter inflation’s effects, preserving cash flow.

Real estate’s scarcity adds to its appeal. Land, the foundation of real estate, is finite, and as populations grow and urbanize, the demand for real estate remains robust, naturally driving up its value. Additionally, real estate investments often involve borrowing funds through mortgages, and in an inflationary environment, the real value of debt decreases, amplifying returns on investment.

Furthermore, real estate is dynamic and can be improved and upgraded, increasing its value and income potential. It encompasses diverse categories such as residential, commercial, and industrial properties, providing built-in diversification benefits.

Diversifying your investments with real estate balances risk during tax hikes and economic uncertainties, reinforcing financial stability when market dynamics change. Structuring lease agreements with inflation adjustments stabilizes rental income, aligning it with inflation to preserve purchasing power, a wise move in uncertain times. This makes it one of those portfolio hedges.

Real estate’s tax advantages significantly enhance after-tax cash flow, mainly through deductions and depreciation benefits, reducing taxable income and maximizing returns. Leveraging tax advantages from property improvements helps reduce taxable rental income, ensuring more earnings remain yours in an evolving tax landscape.

Real estate’s unique attributes, historical resilience, and capacity to counter the effects of inflation make it an exceptional choice for portfolio hedges. It is a tangible, income-generating asset that consistently demonstrates its ability to protect and preserve wealth amid inflationary pressures.

On the date of publication, Julia Magas did not hold (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines

Julia Magas is a writer who covers the latest trends in finance and technology. Her work is published in a number of financial media outlets such as Nasdaq, Cointelegraph, Investing, SeekingAlpha, FXEmpire, and Beincrypto. She primarily covers cryptocurrency and blockchain technology with a focus on market performance, innovations and trends.

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