How to profit from inflation ?

Nobody would have missed the spectacular rise in inflation over the past few months in Singapore. See Figures below for Singapore rate.



The rapid inflation together with gloomy economy outlook has made the stock market very volatile and uncertain. Stagnation will continue to prove to be a challenge for monetary authorities worldwide. For the man on the street, King of Shares feel thats one can potentially "profit" from investments that can provide some sort of hedge against inflation. And he is sticking to the old cliché, “If you cannot beat them, join them.”

CPI (which measures inflation) is calculated by baskets of commodities that are used by people in their daily lives. And over the past few years, the prices of commodities have risen so much that few would not have notice them.

For example: Due to growth in demand and coupled with supply chain issues, crude oil has continuously breached record prices and most recently reached US$140 per barrel. Gold prices, with its demand driven by its use as a monetary reserve in central banks all over the world, have surged above US$1,000 per troy ounce. Just a year ago, crude oil was traded at around US$60 and gold at around US$650 per troy ounce. Against a backdrop of bad global climate, natural disasters, social conflicts and global population growth, the global prices of agriculture products like wheat, corn and live stocks has risen considerably. Due the expansion of emerging economies like China and India, metal prices have risen sharply as well.

Over the years, various investment vehicles have emerged to allow retail investors to “profit” from inflationary commodities prices. Example: commodities futures, funds that track the commodities indexes, stocks that are in the various commodities business. For diversification purposes, King of Shares prefers index trackers and he has identified a few here indexes here.

1. - The Reuter/Jefferies CRB Index (R/J CRB) – 39% Energy, 20% metal, 41% agriculture

2. - The Rogers International Commodities Index (RICI) – 44% Energy, 21% metal, 35% agriculture

3. - The S&P Goldman Sachs Commodity Index (S&P GSCI) – 74% Energy, 10% metal, 11% agriculture

In fact, King of Share himself has recently bought into a fund that tracks the RICI. This fund is managed by Barclays and sold through Standard Chartered.

The prices of commodities are cyclic in nature, this is because when prices are up, demand and supply will readjust itself thus the price will drop accordingly. At the same time, the prices of agricultural products and livestock usually trail that of energy and metals by 1 - 2 cycles. We have already witness the increase of oil and gold.

One of the potential downside of investing in commodities is the imposing of trade embargos by commodities producing countries. If trade embargos are impose to protect the country exposure to rising prices, then commodities cannot be traded and it might lead to downward spiral of commodities prices.

Another downside is that with modern technological and biological advances, farmers and miners are able to grow more and mine more at a unprecedented speed. With more supplies in the market, it will eventually drive down prices.

To make this post more complete, King of Share is going to share with you some of the available investment options, you can consider. Do update me your opinion.

Drool Now....




Disclaimer: It is not the intent of the author to advice the readers to purchase any form of investments after reading this article. Any opinions, conclusions or other information expressed here does not constitute any personal advice. Information are given on a general basis and are subjected to change without notice. The author will not be held liable for any losses resulting from any errors, inaccuracies or omitted data or from the use of the published information.