Three years ago, when inflation turned a religious protest into a violent riot in Tibet, I wrote about the likely increase of such riots in poorer parts of the world. This week, global stock markets were roiled by spreading political unrest in the Middle East, particularly in oil-rich Libya, where the desert nation’s military dictator Moammar Gadhafi engages in civil war to hang on to power.
What started out as food inflation protests against the self-immolation of a vegetable vendor in Tunisia became a socio-political revolution that spread like wildfire throughout the Middle East. Within weeks of the event, regimes in Tunisia and Egypt were quickly toppled, while regimes in neighboring countries such as Jordan, Libya and Algeria struggled to remain in control.
And even before the current situation in Libya hit headlines, the equally-weighted CRB Commodity Index was regularly making all-time highs. The CRB index is important as all constituents have equal weights and show the breadth of the rally in commodities — since last June, the index has climbed more than 50%. And I expect the trend of higher oil prices will continue, especially with the tensions in the Middle East intensifying.
It is mind-boggling when you consider this revolution was caused by global food inflation — a serious issue affecting emerging markets. While we have low reported inflation here in the United States because of the real estate-related components in the CPI, we’re seeing big inflationary issues in emerging markets. So it pays to look for global investments that benefit from rising inflation around the world and serve as inflation hedges.
#1 Precious Metals
This week, we watched as gold hit all-time nominal highs. At its current price, right around $1,400, it looks expensive, but since we are talking about inflation, you would be surprised to know that the inflation-adjusted all-time high from 1980 is close to $2,500 per ounce.
In addition, so far the gold price advance has been rather orderly. Breakout moves have been followed by corrections and periods of consolidation, and as I’ve consistently said, dips in gold are buying opportunities, and I’m expecting to see gold hit $1,600 this year.
I like the SPDR Gold Trust (NYSE: GLD) as a way to play this trend, and we’re up significantly — about 150% — since I recommended the fund as an important part of our China Strategy portfolio back in 2006.