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Investment tips to protect against future inflation

Updated: May 3, 2013 12:14PM

Originally published: December 19, 2002

All that glitters this holiday season . . . is GOLD! Long overlooked, and derided by many, the price of gold has soared to new five-year highs, trading at more than $340 an ounce this week. But why are gold prices suddenly rising? It’s not just talk of war that has sent gold prices higher. More likely gold is up because the holders of trillions of dollars that Americans have sent overseas to buy foreign products are suddenly worried about the future value of the dollar. And with good cause.

In recent weeks, at least one Federal Reserve governor, Ben Bernanke, promised that the Fed will do everything in its power to keep the economy from falling into deflation--even if that means running the printing presses to make unlimited supplies of money available to keep the economy moving.

Running the presses

Those foreign dollar-holders are getting queasy as they contemplate that prospect--and they’re moving their money out of dollars into gold and the euro.

The Euro was worth only 80 cents to the dollar two years ago, and only 86 cents early this year. But today it takes $1.02 to buy one euro--a decline in the value of the dollar of nearly 20 percent.

Northern Trust Chief Economist Paul Kasriel points out that the rest of the world advances us $1.5 billion every day--money we’ve sent overseas to purchase goods, which they reinvest in our Treasury bills and stocks. In fact, Kasriel figures that foreign investors now “own” about 24 percent of America.

A few years ago, Europeans were delighted to take dollars in exchange for things they sold us. America was a growing economy. But now, foreigners are worried that when they liquidate those investments in the future, the dollars they receive will be worth less and less. They’d rather have euros or gold, even if inflation is only moderate now.

Kasriel also points out that while both Europe and the United States currently have the same inflation rate--2.2 percent--you can earn 2.75 percent interest in overnight euro deposits, and only 1.25 percent interest on dollar deposits. If you’re a big global corporation--or central bank--it makes sense to get rid of your dollars. You earn less on them now, and the Fed has promised they’ll be worth less in the future!

What about your dollars?

And what if you’re just an American holding--or owing--dollars? What does all of this mean for you?

If you owe money--as Americans do in record amounts--you should be cheering the Fed’s promise of more inflation down the road. After all, inflation means you’ll repay those dollars with money that’s less valuable. Wage increases inevitably accompany inflation.

But if we have deflation, debtors will find it difficult to get the dollars to repay their loans. Job losses in a slowing economy mean loan defaults, bankruptcies, and foreclosures--as we’ve already seen.

If you’re a saver or a retiree, inflation takes a terrible toll on the value of your money and on your monthly pension check. We experienced that in the 1980s. But if there’s deflation, which means falling prices, then your savings and pension check will buy more.

The deck is stacked

So you might want to take a small portion of your investment dollars to protect against future inflation. Here’s how:

*Buy Treasury inflation-protected IOUs, such as TIPS, or Series I Savings Bonds. (Mutual funds including American Century, Fidelity and Vanguard have funds that specialize in these inflation-adjusted bonds, with a fixed rate, plus a monthly interest adjustment based on the Consumer Price Index. )

*Buy gold stocks or mutual funds. (Most major mutual fund companies have funds that invest in gold shares. The stocks typically pay dividends, which are distributed to fund shareholders, making stocks a more competitive investment than gold bullion or coins.)

*Buy gold coins. Gold coins may be valued as collectors’ items for their rarity; popular, currently minted coins may be valued strictly on the weight of the gold bullion. Deal only with a reputable dealer, and store your coins in a bank vault.

No one knows for sure which way the economy is headed--or whether the Fed printing presses can stave off deflation, if it arrives. That strategy didn’t work in Japan. But it never hurts to hedge your bets. And that’s The Savage Truth.

Terry Savage is a registered investment adviser and is on the board of directors of McDonald’s Corp. She appears weekly on WMAQ-Channel 5’s 4:30 p.m. newscast.

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