Inflation Hedges for the Economic Expansion

The recession is showing strong signs of mending but folks are still out of work and we are not out of the woods yet. However, as the world economies recover it is time, again, to think of inflation hedges. There is going to be pent up demand and there is going to be capital chasing investments. As the economic expansion moves forward the cost of oil, an oil stocks, is already heading up.

A lot of countries have poured a lot of money into economic stimulus packages. That means a lot of public debt. The economic expansion will probably come with a loss of buying power of several major currencies. What will your inflation hedge be? Will you invest in oil stocks, a basket of high tech or biomedical growth stocks, or mining stocks?

Here are two thoughts on inflation hedges. First is that the economies of India and China are still expanding. The USA, Japan, and Europe will come out of the recession. Everyone will need energy and the price of a barrel of oil will be bid up again, probably passing the previous high of $150 a barrel. Thus good inflation hedges would seem to be oil stocks, oil drilling stocks, oil refinery stocks, and the assorted industries that support big oil.

However, oil as an inflation hedge needs to be in a secure location, free from government takeover or revolution, etc. Oil shale deposits in Canada might be a good long-term inflation hedge. The cost of recovering oil is prohibitive when oil is cheap but becomes quite profitable at high oil prices.

Some portion of your inflation hedge might well be in a basket of biotech or other tech stocks. If you hit a winner it will nicely outpace inflation.

A sad fact is that safe drinking water may be hard to come by in a more densely populated world. Any number of companies are developing or acquiring the technology for large-scale water purification. Water purification will probably be an inflation hedge even better than oil stocks. Folks can drive their cars less and turn off the air conditioner but drinking water is a necessity of life, which will unfortunately make water purification stocks the best inflation hedge of all over the long term.

The other issue with inflation hedges is which currency you keep your cash in and where do you buy your stocks. Those who recall the late 70’s know what double-digit inflation coupled with a dismal stock market can do to your pocketbook. We are not advocating currency trading but owning foreign stocks comes to mind as does owning foreign real estate. These choices of inflation hedges come with some of the same risks as investing in big oil operating in unstable parts of the world. However, there are stable, democratic countries, like Costa Rica, that have no standing armies to stage coups and are reasonable prosperous and do not operate on the dollar. Australia can be a great inflation hedge as its mining operations support the developing industrial powers in Asia.

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