Best of the Week
Most Popular
1. Market Decline Will Lead To Pension Collapse, USD Devaluation, And NWO - Raymond_Matison
2.Uber’s Nightmare Has Just Started - Stephen_McBride
3.Stock Market Crash Black Swan Event Set Up Sept 12th? - Brad_Gudgeon
4.GDow Stock Market Trend Forecast Update - Nadeem_Walayat
5.Gold Significant Correction Has Started - Clive_Maund
6.British Pound GBP vs Brexit Chaos Timeline - Nadeem_Walayat
7.Cameco Crash, Uranium Sector Won’t Catch a break - Richard_Mills
8.Recession 2020 Forecast : The New Risks & New Profits Of A Grand Experiment - Dan_Amerman
9.Gold When Global Insanity Prevails - Michael Ballanger
10.UK General Election Forecast 2019 - Betting Market Odds - Nadeem_Walayat
Last 7 days
The Gold Stocks Correction and What Lays Ahead - 19th Oct 19
Gold during Global Monetary Ease - 19th Oct 19
US Treasury Bonds Pause Near Resistance Before The Next Rally - 18th Oct 19
The Biggest Housing Boom in US History Has Just Begun - 18th Oct 19
British Pound Brexit Chaos GBP Trend Forecast - 18th Oct 19
Stocks Don’t Care About Trump Impeachment - 17th Oct 19
Currencies Show A Shift to Safety And Maturity – What Does It Mean? - 17th Oct 19
Stock Market Future Projected Cycles - 17th Oct 19
Weekly SPX & Gold Price Cycle Report - 17th Oct 19
What Makes United Markets Capital Different From Other Online Brokers? - 17th Oct 19
Stock Market Dow Long-term Trend Analysis - 16th Oct 19
This Is Not a Money Printing Press - 16th Oct 19
Online Casino Operator LeoVegas is Optimistic about the Future - 16th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - Video - 16th Oct 19
$100 Silver Has Come And Gone - 16th Oct 19
Stock Market Roll Over Risk to New highs in S&P 500 - 16th Oct 19
10 Best Trading Schools and Courses for Students - 16th Oct 19
Dow Stock Market Short-term Trend Analysis - 15th Oct 19
The Many Aligning Signals in Gold - 15th Oct 19
Market Action Suggests Downside in Precious Metals - 15th Oct 19
US Major Stock Market Indexes Retest Critical Price Channel Resistance - 15th Oct 19
“Baghad Jerome” Powell Denies the Fed Is Using Financial Crisis Tools - 15th Oct 19
British Pound GBP Trend Analysis - 14th Oct 19
A Guide to Financing Your Next Car - 14th Oct 19
America's Ruling Class - Underestimating Them & Overestimating Us - 14th Oct 19
Stock Market Range Bound - 14th Oct 19
Gold, Silver Bonds - Inflation in the Offing? - 14th Oct 19
East-West Trade War: Never Take a Knife to a Gunfight - 14th Oct 19
Consider Precious Metals for Insurance First, Profit Second... - 14th Oct 19
Stock Market Dow Elliott Wave Analysis Forecast - 13th Oct 19
The Most Successful IPOs Have This One Thing in Common - 13th Oct 19
Precious Metals & Stock Market VIX Are Set To Launch Dramatically Higher - 13th Oct 19
Discovery Sport EGR Valve Gasket Problems - Land Rover Dealer Fix - 13th Oct 19
Stock Market US Presidential Cycle - Video - 12th Oct 19
Social Security Is Screwing Millennials - 12th Oct 19
Gold Gifts Traders With Another Rotation Below $1500 - 12th Oct 19
US Dollar Index Trend Analysis - 11th Oct 19
China Golden Week Sales Exceed Expectations - 11th Oct 19
Stock Market Short-term Consolidation Does Not change Secular Bullish Trend - 11th Oct 19
The Allure of Upswings in Silver Mining Stocks - 11th Oct 19
US Housing Market 2018-2019 and 2006-2007: Similarities & Differences - 11th Oct 19
Now Is the Time to Load Up on 5G Stocks - 11th Oct 19
Why the Law Can’t Protect Your Money - 11th Oct 19
Will Miami be the First U.S. Real Estate Bubble to Burst? - 11th Oct 19
How Online Casinos Maximise Profits - 11th Oct 19
3 Tips for Picking Junior Gold Stocks - 10th Oct 19
How Does Inflation Affect Exchange Rates? - 10th Oct 19
This Is the Best Time to Load Up on These 3 Value Stocks - 10th Oct 19
What Makes this Gold Market Rally Different From All Others - 10th Oct 19
Stock Market US Presidential Cycle - 9th Oct 19

Market Oracle FREE Newsletter

Stock Market Trend Forecast Oct - Dec 2019 by Nadeem Walayat

Real Asset Investments as a Hedge Against Inflationary QE

Stock-Markets / Inflation Apr 20, 2012 - 06:46 AM GMT

By: Submissions

Stock-Markets

Best Financial Markets Analysis ArticleAdam Waldman writes: Since the financial crisis and the “Great Recession” began in 2008, western  central banks have responded in a number of different ways.  The one method linking all of these central banks activities together has been the use of Quantitative Easing, or QE as it is more commonly called.


The aim of QE is to stimulate the real economy, and it is considered so-called “Unconventional “
Monetary Policy.  Generally speaking, a central bank will try to boost economic growth by cutting interest.   In theory, lower interest rates will encourage businesses and consumers to increase their economic activity by borrowing money at lower interest rates. 

In the post-World War 2 era, lowering interest rates have sufficed to lift western economies out of economic recessions.  Since the financial crisis started, however, lowering interest rates has not been sufficient to boost economic activity across western economies.  Since 2009 however, interest rates in the European Union (EU), the UK and the US are all one percent or lower, meaning they are at or near the so-called “zero-bound” where they cannot be lowered further, and hence central bankers have turned to QE instead.

The process of QE is best explained by providing a rough overview of the steps involved in its implementation:

  1. First, a central bank will create new money.  In the past, this meant literally printing money; today however it simply means creating new money electronically.
  2. Next, a central bank will use this newly created money to buy more conservative bond investments – generally government or government-guaranteed bonds – directly from financial institutions such as banks, pension funds and insurance companies.
  3. This purchase of government bonds by the central bank should lower the interest rates that these bonds pay to financial investors.  This is based on simple supply and demand.  Large purchases of bonds by a central bank will increase the price of these bonds, which lowers the yield the bonds will pay (when it comes to bonds, their price and yield is inversely proportional).
  4. The hope is that these financial institutions – especially banks – will respond to lower bond yields by lending money to consumers and businesses in the real economy to achieve a higher rate of return.
  5. Then, once the economy recovers, the central bank will sell the bonds back into the marketplace, thereby recovering the new money it created in the first place.

Just to give one example of what the scale of QE has been, to date the UK’s Central Bank, the Bank of England or BOE, has implemented QE  to the tune of £325 billion (or US$517 billion).  Meanwhile, the American central Bank, the Federal Reserve (FED) has used QE to purchase approximately US$2 trillion of bonds in the marketplace.

The major question that central banks’ QE has created in investors’ minds is whether all of this new money will lead to high inflation.  Some analysts have argued that because consumers and businesses are not borrowing and banks are not lending, that the risk of inflation is small because the proceeds from QE are just sitting on financial institutions balance sheets rather than reaching the real economy.

An excellent recent article by Liam Halligan in the UK’s Daily Telegraph, however, notes that inflationary risks of QE are very real.  Mr. Halligan argues the following:

"Future inflation, not disinflation, is the problem the UK faces. For now, most of the QE “proceeds” are sitting on the balance sheets of banks pretending to be solvent...What happens to inflation when that massive increase in base money is leant out? What happens when the mask slips and the markets focus on “currency debasement”, which then pushes up imports prices as sterling falls?" 

Whilst Halligan’s article focuses on the UK, the same question could be asked of the US FED or any central bank which has implemented QE. 

One question investors might ask themselves if they believe that high inflation at some point down the road is a real possibility is “what type of investments would I want to protect my investment portfolio and retirement security from the substantial inflationary risks created by QE?” (whether in the UK or any nation where QE has been implemented).

We believe that the best type of inflation hedge for investors are so-called real asset investments real asset investments as their value generally rises in conjunction with inflation.  A "real asset" in the investment world generally refers to a tangible asset such as timber investments or farmland investments that have an inherent economic  value.  The advantage of investing in the right real assets is that they frequently pay good current income and can also act as an excellent hedge against inflation.  Just to take the example of farmland, we pointed out in a previous article that the long-term rationale for farmland investment is compelling, as global arable land is decreasing whilst global population continues to rise inexorably.  The good thing for retail investors is that real assets such as farmland investments are no longer the preserve of the wealthiest investors such as the legendary Jim Rogers (who is a huge proponent of farmland investing), but are now also accessible by individuals due to a number of innovations in the market.    

Whilst many commentators often discuss the merits of hedging against inflation through the use of commodity Exchange-Traded Funds or ETFs, we believe that commodity  ETFs are driven heavily by financial speculation and hence do not provide the true stability of the real assets themselves.  Nevertheless, there is certainly an argument to be made for at least splitting one’s real asset investments between the tangible assets such as farmland investments and commodity ETFs, especially if one chooses an ETF that follows a well-balanced commodity index. 

Finally, it is worth noting that no matter how keen an investor may be on real asset investments as a hedge against inflation, they are still best used as a complement to a more traditional portfolio as opposed to being one’s sole investments.  As with any investment, including in real assets, there are no hard and fast rules, and investors should analyze their own situation and ultimately make choices with which they feel most comfortable.

Adam Waldman is the Marketing Director at GreenWorld BVI.  GreenWorld specializes in real asset alternative investments such farmland and forestry.   All of GreenWorld’s investments have low enough minimums that they are accessible by individual investors.  The aim is to allow retail investors to access such stable, "hard asset" alternative investments that pay high current income and also offer excellent opportunity of long-term capital gains.

© 2012 Copyright Adam Waldman - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules