Monday, August 10, 2009

Inflation protected portfolio

Even though most (but not all) countries are now going through a phase of very low inflation, or even deflation, this will surely not last long.

Among major economies, annual inflation rates vary between a low of -1.8 % in Japan and +12.0 % in Russia (+27.4 % in Venezuela).

However, budget deficits are also reaching critical levels, due to the stimulus plans and the bailouts of financial institutions: 13.7 % of GDP in the US, 14.4 % in the United Kingdom, 13 % in Iceland, 9.8 % in Spain, etc.

Thus, inflation should start to pick up in a few months (and crude oil - the benchmark West Texas Intermediate - has already passed the US$ 70 per barrel level).

Thus, I recommend this note written in May 2008, as the recommendations are still valid.

These included:

- Treasury Inflation-Protected Securities (TIPS) (or the iShares Lehman TIPs Bond ETF, TIP)
- SPDR Gold Trust ETF (GLD)
- Broad-based commodity index ETFs (such as PowerShares DB Commodity Index Tracking DBC).
- Agricultural commodity index ETFs (for example, PowerShares DB Agriculture DBA; Market Vectors Agribusiness MOO; or E TRACS UBS Bloomberg CMCI Food ETN FUD)
- Canada ETF (EWC), mostly commodity producers
- Pacific ex-Japan ETF (EPP). Includes Australia and New Zealand, also big commodity producers.

I would add the Market Vectors Gold Miners ETF (GDX), and other basic metals: PowerShares DB Base Metals DBB, iShares Silver Trust SLV, iPath DJ AIG Nickel JJN, or iPath DJ-AIG Copper Total Return Sub-IndexSM ETN JJC.

Inflation-proof investing

By Dr. Marvin Appel, Dr. Marvin Appel

Last Update: 12:01 AM ET May 1, 2008

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