How to Protect Your Home and Portfolio From Inflation and Higher Interest Rates

January 25, 2022 Updated: January 25, 2022

Commentary

Recently, we wrote about why inflation is a threat to your portfolio and how it’s being understated. The issue is causing anxiety across income levels, so we’re going to cover how you can protect your home and your portfolio from both inflation and the coming higher interest rates.

We believe that food prices are up significantly more than the 6.3 percent claimed in the most recent Consumer Price Index. Comments for last week’s article indicate that many of you are experiencing the same thing. Given current conditions in the food supply chain combined with problems in shipping and trucking, we believe this trend is going to worsen. For people who can afford it, now would be a good time to ensure you have a freezer full of meat or fish. Using a vacuum sealer will provide a longer shelf life.

A less expensive option is to have a large supply of rice and beans because they can be stored for a long time, and have excellent nutritional value. Other items worth stocking include flour, salt, sugar, chocolate, and coffee.

In the comments, one of you suggested some extra bottles of whiskey. That’s also an excellent idea due to its indefinite shelf life and its use as a store of value. Paper products and cleaning supplies are also excellent to have in times of rising prices and product shortages.

For your portfolio, we have several suggestions to hedge against rising inflation. Precious metals have been accepted as money, and have been used in coins for thousands of years. The downside is these assets produce no cash flow, pay no dividends, and have storage costs. Silver does have some industrial uses, but in the case of high inflation, both metals should be a good hedge for a declining dollar. Due to storage issues, different forms of owning gold and silver have different risks.

While some people like to have precious metals stored in their homes, we don’t love the security risk involved, or the premium price required to take physical delivery. There are some vaults that specialize in storing gold. Think of it like a safe deposit box at a location that only stores gold. The advantage of this option is owning physical gold without needing extra home security. The downside is this can be expensive. Further, some like to keep precious metals close by in case of social collapse, and in that case, your assets may still be inaccessible.

Our preference is to own the exchange traded funds (ETFs) that own gold and silver and closely track the price of the underlying metal. The tickers for those funds are GLD and SLV. We note that those ETFs have expense ratios of 40 basis points (.4 percent of assets) for gold and 50 basis points (.5 percent of assets) for silver, and in certain emergencies, funds invested there may be inaccessible.

It’s important to acknowledge that we’re hedging for inflation and not Armageddon. For those of you focused on disaster protection, owning small gold and silver coins might be the way to go.

We also think oil is an excellent investment during inflationary times. The reason we’re interested in oil right now is that a certain amount of energy demand is consistent, and oil tends to be priced in dollars.

However, trying to trade oil through the commodity markets can be challenging, and best left to professional traders. A safer solution would be to own a collection of high-quality oil producers. We’d focus on companies with reserves that are well-established so that the key operating issue will be pricing instead of permitting.

Due to environmental activism, it’s difficult to get new wells permitted. So, even if oil prices continue to rise, production may not increase at levels seen in the past. There are advantages right now to having an already-operating oil field so we’d place a premium on that.

Epoch Times Photo
A graph showing the increase in the price of Brent Crude Oil in the last year. (Source: TradingView)

Investors with a little more appetite for risk might consider a small position in bitcoin. In the short term, the cryptocurrency has tended to trade as a “risk” asset meaning it often moves in the same direction as the market, and typically with greater volatility.

However, bitcoin is a deflationary asset meaning that, unlike the U.S. dollar, the supply of bitcoins is fixed. In addition, the rate of increase in that supply decreases over time. In many ways, the cryptocurrency space is beginning to resemble gold as more people use it to preserve wealth in an inflationary environment.

People in Venezuela have been turning to bitcoin for a medium of exchange as their own currency has collapsed. Turkey has been inflating away the value of its currency (a policy the U.S. Federal Reserve is also following), causing the value of bitcoin in lira to rise 11x in the last two years:

Epoch Times Photo
A graph showing the value of bitcoin in Turkish lira going from approximately 50,000 to 542,000 in the last two years. (Source: TradingView)

The Federal Reserve is going to react to the large and increasing inflation numbers by winding down the current quantitative easing program, and increasing interest rates in 2022. This will start to reverse the excess liquidity that was a leading cause of stock prices reaching record levels in 2021. The markets have already started to decline on expectations of higher rates.

For those of you who want to stay invested in individual stocks that you like, it would be worthwhile to consider hedging that exposure with short positions in either the S&P 500 Index (ticker: SPY) and the Nasdaq-100 Index (ticker: QQQ).

More advanced investors can effectively buy insurance against a market drop by purchasing put options on the above indexes. We caution that short positions expose investors to unlimited losses, and the purchase of options can result in the loss of 100 percent of capital. For anyone who isn’t an experienced investor, it’s a good idea to check in with a trusted advisor who can assist you with the riskier aspects of portfolio management.

As we move through the next year, think of inflation and interest rates like two ends of a seesaw. Higher inflation will cause the Federal Reserve to raise interest rates, or at least talk about higher rates.

In turn, that can lead to lower stock and commodity prices which can reduce the expectations for inflation. As we pointed out last week, the United States currently has record low real interest rates so it’s going to take some movement by the Fed rather than just some talk to address rising prices.

Next week, we’ll be writing about some of the quirkier places we’re seeing inflation in the collectibles market. For those of you interested in more detail on how inflation, interest rates, and stock and commodity prices are linked, let us know in the comments, and we’ll make it the subject of a future column.

Views expressed in this article are the opinions of the author and do not necessarily reflect the views of The Epoch Times.

Gary Brode
Gary Brode has spent three decades in the hedge fund business. Most recently, he was Managing Partner and Senior Portfolio manager for Silver Arrow Investment Management, a concentrated long-only hedge fund with options-based hedging. In 2020, he launched Deep Knowledge Investing, a research firm that works with portfolio managers, RIAs, family offices, and individuals to help them earn higher returns in the equity portion of their portfolios. Mr. Brode’s work has been featured in the Wall Street Journal and Barron’s, and in appearances on CNBC, Bloomberg West, and RealVision.