When inflation rates are high, money buys fewer goods and services. This is commonly reflected in the higher prices of groceries and at the gas pump. What also occurs is that the dollar becomes devalued, worth less than it was during a period of low inflation. In addition to creating a situation where we pay more for common items, inflation takes its toll on the investment portfolio.

An increase in the money supply is what leads to inflation. With the recent economic crisis, the Fed flooded the market with new money to bail out entities like automakers and banks. During inflationary times, the prices of assets such as real estate, stocks, and bonds, increase. This means it costs more for investors to purchase shares of desired stocks.

The overall impact of inflation on an investment portfolio depends on the type of securities held. During inflationary periods, a company’s returns are often overstated. The company may appear to be growing but inflation may be the primary reason for this apparent growth. In addition, depending on a company’s inventory valuation technique, inflation can severely impact its earnings.

Investing dollars, whose values are shrinking, in things like gold coins helps individuals to protect their portfolios. Inflation has been the most consistent factor in determining the price of gold. During the most recent five year-long periods that had the highest inflation, the average real return on Dow stocks was -12.33 percent, while gold had an average real return of 130.4 percent.

To protect the financial portfolio against increasing inflation, buy some gold. In addition to serving as an inflationary hedge, gold also hedges against the declining value of the dollar. It is a safe haven investment, something an individual can turn to for security when confidence in the dollar and the government is lost.

Keep learning more:

1. Gold Is The Best Inflation Hedge


2. Inflation is the Biggest Risk of Bond Investing


3. TIPS 101: Treasury Inflation Protection Securities


4. Buying Gold Isn’t Always An Investment, It’s Insurance


5. Gold Is The Only Global Currency


6. How Much of Your Portfolio Should Be in Bonds?


7. The Different Ways To Invest In Gold

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