At times like the present when you have a substantial portfolio of stocks is nerve-racking. The markets for equity have been making new all-time highs but the rationale for these price increases is a bit shaky.

Old-timers who managed money during Black Monday (1987) and the Dot-com bubble (1995-2000) warn of the potential for similar events today at the same time that Wall Street encourages retail investors to take on more risk.

Investors with a prominent name like Ray Dalio and Mark Mobius are publicly stating that investors should have between 5 and 10 percent of their funds that they can invest held physically Gold. For instance, the Ray Dalio All-weather Portfolio as an illustration, has an 7.5 percent allocation to Gold.

Highly successful investors are recommending physical Gold as a hedge against the market for stocks while also highlighting the danger of currency devaluations in the aftermath of massive pandemic-related fiscal and monetary stimulus.

In this brief article we'll discuss various strategies for hedging an Portfolio of Investments against stock market and Inflation risk.

Exactly how to hedge against rising cost of living

There are many items that are often referred to as inflation hedges:

Precious metals (Silver particularly)

Commodities

Real estate investment trusts (REIT)

Treasury Inflation Protected Securities (TIPS)

As with all possible Investments like all investment options, each class of asset has pluses and minuses that an investor should take into consideration.

Precious metals

Holding and purchasing physically Gold and Silver is a well-established strategy for hedging against Inflation. Metals that are precious are also a good option to diversify an Investment portfolio and hedge against stock market risk.

During the Great Inflation of the 1970s (1963 to 1980) Gold rose 1600 percent and Silver rose 2700%. Investors with foresight could purchase Silver for $1.29 and Gold for $35 an ounce in 1963. In 1980 these savvy investors could take profits on their investments at $50 or $800 per one ounce.

The ideal method of investing in Silver or Gold is to take personal possession of the Precious metals and keep them in a local storage facility.

It is also possible to be exposed to the metals through ETFs, Gold Trusts (e.g. GLD, GLD), Silver Trusts (e.g. SLV) as well as certificate programs (e.g., Perth Mint).

Investors with tax-advantaged retirement savings can buy physical Precious metals with those funds by opening an self-directed Gold IRA. Tax-free and tax-deferred Retirement accounts can be converted into Gold IRAs.

Commodities

Commodities are real assets, such as orange juice and rolled steel. When inflation is high, prices on real goods tend to increase.

From https://sites.google.com/view/registeredinvestmentadvisor/precious-metals an Investment perspective there are two kinds of commodities to be aware of: soft and hard.

Hard commodities must be mined or drilled and this is the case for precious metals including aluminum, copper, natural gas, crude oil, and so on.

Soft commodities grow in the soil or walk across it with four hooves. Wheat, corn live hogs, as well as feeder cattle are all examples that are soft commodities.

ETFs allow investors for investors to put money into both hard and soft commodities.

Futures on commodities are not advised due to the risk of assignment. Options on commodity futures are an option to hedge your stock but these securities represent an extremely high risk.

Real estate investment trust (REIT)

REITs are investment vehicles that hold pools of income-producing real Estate. Inflation can push rental rates and property prices higher.

Investors purchase individual shares of a REIT to gain exposure to Real Estate without taking on the burden of locating or financing the properties them.

Residential REITs focus on housing units, single-family homes, mobile homes, and student housing. Commercial REITs focus on office buildings, retail stores, hotels, as well as other forms of business properties that generate income.

A small portion of REITs concentrate on the holding of loans from mortgage lenders (Mortgage REIT) while the majority of REITs focus on holding properties that generate income (Equity REIT).

Treasury Inflation Protected Securities (TIPS)

TIPS which is also known as Treasury Inflation Protected Securities, combine the security of the Treasury bond with the assurance that the buyer will receive their initial Investment back.

The principal amount of TIPS bonds is the principal amount. TIPS bond will be adjusted to match that of the CPI (Consumer Price Index) throughout the term that the bond is in force. The annual coupon payment is based on the principal amount of the bond. This means that investors receive an inflation-adjusted amount from their TIPS.

As an example, consider an investor who owns $15,000 worth of 5-year TIPS with the 1% coupon rate. If Inflation (as measured using CPI) is 4%, then the bond's value CPI) is 4.4%, the $15,000 worth of bonds are adjusted upwards to $15,600. The bond's coupon is then calculated based on the adjusted value of the principal so the bondholder earns $156 of interest for the entire year.

Notice that the investor's original investment (the primary of the bond) is being adjusted for inflation in this instance, however the investor is locked into a 1% interest rate in an environment that has higher rates of coupon likely to be available.

For investors who are cautious about risk, the lower return from TIPS could be acceptable for the perceived safety of the US Treasury bond.

The best way to evade versus Inflation

We have to be careful when we start talking about the best of anything in the investing world. The best hedge against Inflation is likely to be different for a 25-year old than for a 65-year old.

An investor's tolerance for risk also affects what their ideal Inflation hedge will look like. A risk-averse investor may avoid commodities because of volatility while the risk-tolerant investor loads up on physical Silver and shares of energy ETFs.

Why is Gold a hedge against Inflation

Gold is seen as a security against Inflation because the price of Gold increases when the purchasing power of the currency in which the metal is priced decreases.

The price of the gentleman’s dress is used to illustrate the most classic illustration of Gold acting as an insurance against Inflation.

In 1922, a custom-tailored wool suit (a aEURoebespokeaEUR suit) with an additional pair of pants cost about $25 US Dollars. gold was priced at $20.67 per an ounce.

Fast forward to the present and similar manaEUR(tm)s suit will cost between $1500 and $2000. Gold selling for about $1800 an ounce.

It's been 100 years since one ounce of Gold has protected its holder from the ravages of Inflation.

How to buy Gold

There are many ways you can invest your money in Gold. Like we said the best Gold Investment involves purchasing the physical metal and then storing it in a location that has ready access to it.

After that foundation is laid There are a variety of methods to make investments in Gold:

Physical Gold Trusts and ETFs (e.g., Sprott Physical Gold Trust PHYS, or GLD)

Mining shares, warrants, and options

Self-directed Precious Metals IRAs (Gold IRAs)

Gold futures

Options on Gold futures

Physical Gold Trust

The Physical Gold Trusts such as GLD (SPDR Gold Shares Trust) are fraudulent because they give investors the appearance of owning physical Gold however all the owner actually has is shares of a security which is (supposedly) connected in some manner to physical Gold.

It is vital to realize this fact: Gold Trusts are not securities, but Gold itself. The Trusts are derivatives from physical Gold however they do not give an investor any ownership stake in the actual metal.

The Gold Trust shares can supposedly be redeemed for physical metal, but only investors who have a solid financial foundation are in a position to do this.

The Sprott Physical Gold Trust (PHYS) requires that investors redeem their shares in 400oz increments. With Gold around $1780 an ounce, this implies that an investor needs $712,000 worth of PHYS before it's possible to get the actual metal.

GLD which is the SPDR Gold Shares Trust, is a trust with an an even higher threshold for taking delivery of physical Gold.

Investors who have been approved to redeem up to 100,000 GLD shares at any given time and request the delivery of physical Gold. at today’s value (01/07/2022) it is an Investment of approximately $16.8 million US dollars.

Self-directed Precious metals IRA

Precious metals IRAs offer investors a way to create an Gold security hedge with Tax-deferred Retirement funds.

If an investor is prepared to pay the 10% penalty for premature withdrawals of tax-deferred and tax-exempt funds (401K 403b Traditional IRA and so on. ) The funds are effectively locked up in some form of IRS-approved investment vehicle up to the age of 59 1/2 .

Gold IRAs are in the category of Investments that are approved and permit investors to enjoy the protection and security that comes with physical Gold ownership, without paying tax or penalties in the process.

Final thoughts

In this short piece, we've talked primarily about using Gold to hedge against the stock market risk caused by Inflation.

Stock Portfolios can be subject to a variety of other risks, including inflation. There is equity risk, liquidity risk, and currency risk that investors need be aware of and potentially, to take precautions against.

Luckily, Gold is able to mitigate these risks as well. Portfolio performance studies show that even a small amount of