Inflation Wants To Eat Your Money But You Can Beat It With Gold

Very few people fear inflation in the same way that they are concerned about a downturn in the stock market. It eats away at your money in a persistent way that is hard to perceive on a day to day basis. Yet, if you evaluate the impact of inflation on the buying power of a dollar after a long period of time the damage can be catastrophic. It is similar to how termites can eat a home from the inside out over time once they gain a foothold. The latest figures show that inflation is rising rapidly and the purchasing power of the US dollar is in decline. According to the Bureau of Labor Statistics the index for the price of used cars and trucks continued to rise sharply, increasing 29.7% over the past year. The energy index rose 28.5% over the last 12-months.

Over the past 10 years inflation has averaged roughly 2%, until this past year when inflation started to spike in a significant way as reflected in the Consumer Price Index increasing 5%. Now, let's check what would happen to your money if inflation averaged 5% for 18 years, for illustrative purposes. Say you have $20,000 in the bank, earning interest at a rate of .9%. With an inflationary rate of 5% that $20,000 will be worth just $9,334.60 in 18 years relative to its buying power today. It took 18 years for that money to devalue in this scenario to less than half its current buying power today. During those eighteen years we may have not fully appreciated that our money was losing its worth if we didnt put in the effort to understand how inflation works.

It is common to not like risk and be frightened by the downturns in the market. So many of us place our money in the bank and just let it sit there earning interest. It may feel like your money is safe in the bank with FDIC insurance. However, when inflation is running at a 5% annualized rate and a CD is paying a .9% interest rate the numbers just dont work out pretty for savers.

The bank is one of the places that you can keep your money and know that it is virtually guaranteed to lose its purchasing power over time. In fact, you could accurately think that the more time you spend letting your money earn interest in the bank, the more “real” money that you are guaranteed to lose.

When the Federal Reserve talks about low or transitory inflation, while it may be true for the economy overall, it certainly does not feel that way to the average consumer. When I go to the gas station I can say for sure that my money does not go nearly as far as it used to. At night when I look for homes on Zillow I can see their prices rising rapidly. My neighbor sold their house into a bidding war at well over asking.

Inflation is definitely there, it is gaining strength, and it is your enemy. The urgency for fighting inflation has been especially clear after the Federal Reserve increased the money supply by 25%. It is pretty hard to imagine how you can create 25% more money out of thin air without it pushing prices straight up. The good news is that there is a clear antidote to the way that inflation slowly poisons your portfolio.

Gold has done a phenomenal job of keeping ahead of the pace of inflation and has stood the test of time. While the Federal Reserve can print money, they cant print gold. Gold is ultrasound money in a world that is addicted to the printing press. The key to letting gold really work for you is employing it in a way that enables you to both own gold and earn a yield.

The Solactive Gold-Backed Bond Index has compounded at 14.57% annualized since 1/3/2006. It is designed to invest in a portfolio of investment grade corporate bonds, then hedge that portfolio 100% to the price of gold. Strategy Shares Gold-Hedged Bond ETF (NYSE:GLDB) is designed to track the Solactive Gold-Backed Bond Index and can be a great ally in your battle against inflation. This compares favorably with sovereign gold bonds which are government bonds that are denominated in the price of gold.

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