The U.S. Labor Department recently released August inflation numbers, showing that consumer prices rose 0.4% on the month. That’s an annualized rate of 3.8% and the ugliest pace since November 2008.
Meanwhile, in the wake of the Fed’s FOMC meeting last week and “Operation Twist,” some Federal Reserve officials have gone on the record expressing concern over the idea that we can find growth through policies that spark widespread inflation.
But you don’t have to look far to find signs that inflation is on the march. Just go to the gas pump or grocery store and you’ll see it in action. Your receipt will tell you the story just as well as these news items, as everything from gasoline to beef to vegetables are pricier these days.
Throw in the fact that wages are stagnant and the market is just shy of flat year to date in 2011, and the never-ending price creep is even more infuriating.
But don’t get mad at inflation. Get even.
A savvy investor can profit from the big inflationary trends right now and hopefully offset the damage caused by price increases — and then some. Here are three moves to make now to profit from inflationary pressures.
Buy Gold and/or Silver
You might think I’m about to say “gold is a terrific hedge against inflation.” Well, it’s not. Consider that the inflation-adjusted price of gold was about $1,850 in 1980 — then fell to about $350 in 2001. Clearly much more moves gold than inflation.
Plainly put, gold is a crisis hedge. That’s the biggest reason for the move into the metal now, and a big reason for the 1980 gold bubble (many market historians have correlated the beginning of a 1979 run in gold to the Soviet invasion of Afghanistan and the resulting global shock amid the Cold War). Inflation can be part of the economic mess at the time gold goes on a run, but it’s not the sole driver.
Silver has become gold’s cousin these days as a “safe haven.” With CDs and T-Notes yielding next to nothing and many folks scared of the stock market, these physical assets are in favor. Investments to consider along these lines include the physical gold and silver ETFs, the SPDR Gold Trust (NYSE:GLD), the iShares Gold Trust (NYSE:IAU) and the iShares Silver Trust (NYSE:SLV).
Don’t get into gold or silver because you think they are pure inflation hedges, however. They are not. But they are effective crisis hedges. Many folks think that no growth, stagnant wages and growing consumer prices equals a crisis — and rightly so.
Buy Oil Stocks
Remember those record profits seen by Big Oil in 2008 as crude oil pushed $150 a barrel? Well, that’s the most obvious example in recent memory of how skyrocketing oil prices result in skyrocketing returns for oil stocks.
Of course, you can’t actually point to big profits at oil stocks in 2008 … if you’ll recall, financial Armageddon put a bit of a damper on things that year for every sector.
But after seeing earnings and revenue roll back with oil prices, there is the prospect of a brisk run-up in oil in the months ahead. Yes, demand is soft, but the International Energy Agency reports that worldwide demand will rise by 1.2% (to 89.3 million barrels a day) this year and 1.6% (to 90.7 million barrels a day) next year. So the direction still is up, even if not as steeply as we thought. Supply also is really being crimped by the Arab Spring and supply disruptions in the Middle East. In fact, even in this environment of reduced demand, the CEO of Hess (NYSE:HES) has warned of an oil shock and “energy crisis” if supplies are not ramped up soon.
Even if you don’t believe any of the supply/demand games, simply bank on inflation. Remember, energy inflation is one of the prime drivers of Consumer Price Index metrics — so much so that it’s excluded from the “core” numbers.
Getting into Big Oil like Exxon Mobil (NYSE:XOM) or Chevron (NYSE:CVX) could be profitable — and considering the 3% dividends or so in the sector, you have incentive to stick around in these stocks for the long term as inflation heats up.
Traders can try to just buy oil outright via ETFs like the iPath S&P GSCI Crude Oil Fund (NYSE:OIL), which is pegged to West Texas Intermediate crude oil futures contracts. But that is an aggressive game, and the expenses and other practical limitations mean that the OIL fund is not a 1-to-1 correlation with oil prices. But it’s close, and directionally accurate if you want to simply play oil.
Buy Agribusiness Stocks
In 2011, the USDA projects the price index for “all food” is will increase 3% to 4%. That breaks down with “Food-at-home (grocery store) prices are forecast to rise 3.5% to 4.5%, while food-away-from-home (restaurant) prices are forecast to increase 3% to 4%.” On top of that, 2012 projections predict another food-at-home price increase of 3% to 4%.
Not looking forward to those steep grocery bills? Well, your best bet is to get into the business of food and agriculture to profit. Just as higher crude oil prices boost profits for Exxon, higher grain prices boost profits for farmers and related businesses.
Obviously, there are no publicly traded veggie farms — and food processors and packaged food companies often get squeezed by inflation more than anything else. So go right to the source with seed giants Monsanto (NYSE:MON) and Syngenta (NYSE:SYT) or fertilizer giants including Potash (NYSE:POT) and Mosaic (NYSE:MOS). When crop prices are up, farmers have a big incentive to plant as much as possible and boost their yield — and their bottom line. That means more seed, herbicide and fertilizer sales.
The Market Vectors Agribusiness ETF (NYSE:MOO) is a good broad-based play because it includes all four of these picks, as well as Deere & Co. (NYSE:DE) and other agribusiness-related plays.
It’s not an apples-to-apples play on the rising price of food, to be sure. But agribusiness stocks do tend to benefit from higher crop prices — and inflation will ensure those prices indeed move up.
Jeff Reeves is the editor of InvestorPlace.com. As of this writing, he owned a a position in the IYE energy ETF but none of the individual stocks named here. Write him at firstname.lastname@example.org, follow him on Twitter via @JeffReevesIP and become a fan of InvestorPlace on Facebook.