Insuring Your Wealth: Protect Against Inflation with Commodities

Name: Jared Irish Company: Archer Financial Services

Years Trading: 4 Favorite Movie: The Oil Factor

If consumers and investors are going to survive in the current economic environment, they must act to protect themselves against inflation.  Because we have not seen major inflationary pressures in almost a generation, many have forgotten or are unaware of the devastating pressures that can arise from an inflationary cycle.  I believe that President Gerald Ford explained the forces of inflation best in his speech entitled Whip Inflation Now as he said:

“But I say to you with all sincerity that our inflation, our public enemy number one, will, unless whipped, destroy our country, our homes, our liberties, our property, and finally our national pride, as surely as any well-armed wartime enemy.”

Although commodities are becoming more widely accepted, the sector is still less popular than some other investment vehicles. To put this into perspective, consider that commodity funds still make up less than 1% of the available funds today.  The lack of consideration of the economic environment we are in is one key mistake that is made by the majority of financial planners and investors. Quality investors must pay attention to the trends taking place, particularly inflation. The chart below shows us that stocks have gone nowhere over the past decade, while commodities on the other hand, have done quite well.   

10-Year S&P

Source: Commodity.com

A typical traditional allocation will include stocks, bonds, and cash. Since the US stock market has shown limited returns. Investments in US bonds and cash have not produced stellar results either. Investors of fixed income must consider the possibility of rising interest rates and inflation.  The 30 year bond is currently yielding 4.45 percent. That is slightly more than the inflation rate of 4.2%.  Traditional investors believe they can reduce the risk of losing wealth if they invest in the 30 year bond.  After all, no profit is better than a loss.  An investor could also buy a corporate bond, which might result in slightly positive real return.  That is, if you believe that the government’s stated inflation numbers are correct.

Economist John Williams makes a convincing argument that the true rate of inflation is actually between 10 and 12%.  Under these assumptions a fixed income investment at 4.5% now guarantees large losses, as inflation erodes the value of wealth.   

Chart courtesy of Shadowstats.com

Currently, interest rates are at historically low levels, but will likely rise sometime over the next 18 months.  Rising interest rates in 1980 left many fixed income investors devastated as they watched the value of their portfolios plunge. At the same time, properly positioned investors were rewarded handsomely.  Now is the time to prepare for rising interest rates; not to invest in fixed income.  

The last component of the traditional portfolio is the holding of cash or US dollars. This “safe” investment has lost nearly half of its purchasing power since 2002.  Most traditional investors in the United States are currently overweighting positions in US dollars. They, for some reason, believe they are not invested if they hold their wealth in these pieces of paper.  Even my local shoe shiner knows where the dollar is headed.  Investing in the undervalued Asian currencies and the currencies of commodity producing countries can offer protection as the dollar continues to fall.  

See chart below: The dollar is currently getting a chance to take a breath before her head is plunged under the water again.  If we come to the period of rising interest rates and the dollar does not strengthen, it will be confirmed that we are in a flat out dollar crisis.


Source: Beespoke Investments

History shows us that severe inflationary periods are characterized by a similar set of circumstances.  These circumstances are almost identical to what we are beginning to experience today.   They include rapid increases in population along with shortages of resources; especially the basic necessities of life.  History has shown that they eventually lead to war.  They include the excessive expansion of money and the transfer of wealth to those who own hard assets.  They include skyrocketing unemployment, homelessness and crime rates.  It is clearly evident that we are entering a similar inflationary era today.  For more shocking evidence on this subject matter, I suggest reading the book entitled “The Great Wave” by David Hacket Fischer.  

History also shows us that we are in the fourth major inflationary period since 1870.  These inflationary periods have lasted an average of 18 years, which leaves plenty of room for the current cycle to continue.

Source: NBER, Standard & Poor's Corportation, U.S. Dept. of Commerce, Legg Mason  

Many average investors along with the media have been fooled so far. However, as food and energy prices continue to soar they are beginning to wake up to reality.   The consumer is being drained as their stocks and real estate fall in value and as taxes and inflation crunch their wallets. The government can continue to offer cheaper credit, free lunches, and bailout programs. They can continue to rob Peter to pay Paul, but in the end, they have no choice but to swallow the inflation pill.  The secular commodity bull market is poised to accelerate in the years to come.  Those who take action now can still protect themselves. The worst of the current inflationary spiral is in front of us and will likely accelerate in the years to come. Wealth and power will be transferred from those who consume the world’s resources to those who control them.  Since most traditional investors are likely to lose substantial amounts of their purchasing power, there is still time to take action to benefit from this wealth transfer. Energy, grains, and metals will continue to outperform many traditional investments. Buy on weakness and use a strategy that will tolerate high levels of volatility.   

If you would like to learn more about profiting from inflation and investing in commodities you can email me at jared.irish@archerfinancials.com or call me at 1-877-377-7936.  You may request your free book entitled, “The Age of Inflation” Continued by Hans Sennholz.

Futures and options trading involve significant risk of loss and may not be suitable for everyone. Therefore, carefully consider whether such trading is suitable for you in light of your financial condition. The views and opinions expressed in this letter are those of the author and do not reflect the views of ADM Investor Services, Inc. or its staff.  The information provided is designed to assist in your analysis and evaluation of the futures and options markets.  However, any decisions you may make to buy, sell or hold a futures or options position on such research are entirely your own and not in any way deemed to be endorsed by or attributed to ADMIS. Copyright © ADM Investor Services, Inc.

About the Author

Jared Irish graduated with a B.S. in Finance with major course work completed at the Carlson School of Management and his undergraduate studies at Metropolitan State University. After working for a bank and a small hedge fund, he joined Archer Financial Services in 2006. He was led to the commodity markets in 2001 through his study of Austrian Economics and the Daily Reckoning newsletter. He believes commodities as an investment offer the potential to protect and profit from inflation, war, natural disaster, and famine. Jared is currently a member of the Agora Wealth Reserve, Chicago Coin Club, Chicago Rotary Club, CAIA, and Sovereign Society. He is also an avid drummer.