Storing money in value investments such as gold, real estate, stocks and crypto helps limit inflation.
Since cash loses purchasing power over time, holding cash leads to people losing their savings. This has prompted people to store their money in value investments such as gold, real estate, stocks and now crypto. Will Bitcoin protect against inflation has been a question in the city ever since.
To be held as a store of value, an asset must be able to maintain its purchasing power over time. In other words, it should appreciate in value or at least remain stable. Important properties of such assets are scarcity, accessibility and sustainability.
Gold as a hedge against inflation
Gold has had a mixed track record during past periods of inflation. In the 1980s, there were times when owning gold produced negative returns for owners.
Morningstar Data gives a look at how gold has had a patchy track record during past periods of inflation. A commodity that is supposed to hedge against inflation is expected to rise as consumer prices rise. During periods of high inflation, particularly in the 1980s, there were times when gold owners ended up seeing negative returns.
Lately, gold has slowly lost its shine as a hedge. During the pandemic and even when the waves have receded, people are showing less interest in gold. It is still considered good enough to hold value over the long term, but the metal is now considered less reliable for the short term.
Real estate as a hedge against inflation
The bursting of the US housing bubble underlined that real estate cannot always be trusted as a hedge against inflation.
Real estate has long been seen as an effective hedge against inflation. However, this myth was broken in the housing bubble in the United States. In March 2007, house sales and prices in the country suffered a sharp decline. As data from the National Association of Realtors (NAR) shows, sales dropped 13% to 482,000 from the peak of 554,000 in March 2006.
In America and around the world, real estate prices are closely linked to factors such as government policies, political and economic stability of the country, local demographics and economy, geographic location and infrastructure, among others. Parameters are just too much for an ordinary person to understand.
Equities as a hedge against inflation
Long-term investments in stocks help to overcome the effects of inflation. Just make sure the company has strong foundations.
Some stocks help protect the value of your investment. Even if these stocks are hit in the short term by impatient investors, they recover well over time. But you should keep in mind that not all stocks work well for hedging inflation. You need to find companies that have strong fundamentals and are more likely to receive better dividends for their shareholders.
A common thread: linking gold, real estate and stocks to centralized entities
Traditional asset classes are controlled by centralized authorities, making them vulnerable to bias and pressure.
The value proposition of all conventional asset classes is invariably linked to the policies of centralized authorities such as governments or federal banks. An asset so intrinsically linked to a system that the owners of the assets cannot interfere with is not really a reliable hedge as the centralized authority exercises a single button control over the procedure.