Inflation Hedge: All You Need to Know
Investment usually involves taking risks in order to gain profits (sometimes losses are inevitable). For that reason, as an investor, you need to understand what an inflation hedge means.
It is a straightforward thing to understand, there is no rocket science in it – and understanding inflation hedge can do you a lot of good as an investor.
So, what’s an inflation hedge?
It’s merely an investment which is intended to protect an investor from the decreasing purchasing power of a particular currency. Usually, the purchasing power sets in when the currency loses its value as a result of rising prices (inflation).
Form an eagle’s eye; it’s merely investing in that particular asset which is expected to increase or maintain its value over a specified period. Also, it can be to take a higher position in an asset, which is likely to decrease in value but less rapid than that of the currency.
Inflation Hedge at the Best
By conventional wisdom, gold ranks as the best inflation hedge, while the stocks are sometimes vulnerable whenever inflation takes off. Nevertheless, you need to protect your portfolio against unexpected inflation.
Basically, inflation hedging protects the value of your investment. As much as some investments may look to give some good return, they still can be a loss once inflation is factored in; therefore, inflation hedge assets are essential.
For instance, if a dollar happens to lose value due to inflation, gold becomes expensive; therefore, a gold owner is hedged against the dollar. Eventually, it becomes a case of win-win as the investor is compensated for inflation with several dollars for just an ounce of gold.
Limitations of Inflation Hedging
Inflation hedging can be useful, yes, but it doesn’t mean it has got no limits. In fact, it can be volatile at times. For example, some companies can indulge in inflation hedging so as to keep operation costs as low as possible.
Delta Air Lines (an oil refinery) decided to produce their own oil at a low cost than buying hence hedging directly against the jet fuel price inflation. However, the company hasn’t made money in years, thereby limiting the effectiveness of its inflation hedge.
Some variables play a significant role in inflation hedging. They continually keep on changing, and they include, technological innovation, global population growth, Chinese economic growth, production spikes as well as outages, political turmoil, and global infrastructure spending.