2 Metals to Hedge Against Inflation

by Richard Band | February 27, 2012 6:30 am

2 Metals to Hedge Against Inflation

I’m acutely mindful of inflation as I formulate my advice to you, and particularly when constructing my portfolio. I own very few long-term bonds. In the stock segment of my portfolio, I emphasize companies with a proven ability to grow their earnings and dividends faster than the cost of living.

Even so, I recognize that some investors may want to launch a more aggressive, preemptive strike against the inflation monster. If you’re a true inflation worrier, you’ll be drawn almost irresistibly to precious metals, the age-old hedge against debasement of paper currency.

In my model portfolio, I already have one explicit inflation hedge in Barrick Gold (NYSE:ABX[1]), the world’s largest gold-mining company. I continue to rate the shares a buy.

If you would like to go a step further and own precious metals directly, gold bullion is certainly an option. However, two other metals — platinum and silver — may offer greater appreciation potential. As it happens, exchange-traded funds now exist that allow you to invest in these metals without the hassle and expense of storing and insuring ingots (or coins) on your own:

ETFS Physical Platinum Shares (NYSE:PPLT[2]). Platinum is 30 times rarer than gold. As a result, this noble metal, keenly prized in jewelry and essential in a number of industrial applications, has nearly always sold at a premium to gold. As recently as the summer of 2008, platinum fetched more than double the gold price.

Yet today, platinum trades a 5% discount to gold — a rare and unsustainable anomaly. Either gold will fall or, more likely, platinum will rise sharply as inflation pressures build in the next few years. PPLT gives you a stake in the metal for an all-in cost of only 60 cents a year per $100 invested (plus, of course, your initial stockbroker’s commission to buy the shares).

iShares Silver Trust (NYSE:SLV[3]). Like platinum, silver appears significantly undervalued relative to gold. Last April, before the latest round of Euro-panic set in, one ounce of gold would have purchased 32 ounces of silver. Above-ground supplies of the two metals, as well as their prevalence in the earth’s crust, would suggest a ratio of about 10:1. Yet gold currently sells for 52X the silver price.

If another protracted inflationary episode lies in our future, small investors will almost certainly flock to “poor man’s gold,” as they’ve done repeatedly throughout history. SLV, with its modest 0.5% annual expense ratio, will let you play the game efficiently and conveniently.

Endnotes:
  1. ABX: http://studio-5.financialcontent.com/investplace/quote?Symbol=ABX
  2. PPLT: http://studio-5.financialcontent.com/investplace/quote?Symbol=PPLT
  3. SLV: http://studio-5.financialcontent.com/investplace/quote?Symbol=SLV

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