Protect Against Inflation With ETFs

[WallyWeaver]

This is a pretty good read. As many here know, I am heavily invested in AGQ (99% of my brokerage account), so I am obviously a big believer in ETF's. For those that don't know AGQ is double-leveraged ETF based on the silver futures price.

What I didn't know, however, and this article plainly points it out, is there are ETF's for gasoline prices, healthcare costs, and even food costs, to name a few. All that to say, pretty interesting read.

WW.

Protect Against Inflation With ETFs

November 1, 2012 by: Paul Nathan

There is continual debate by the average lay investor over what the real rate of inflation is. Professionals look at many indexes: the Consumer Price Index or CPI; the Producer Price Index or PPI; the core CPI and PPI, which excludes food and energy; and some rely on entirely different measurements altogether, such as the GDP Deflator. Obviously, each of these methods of measuring inflation provides different results -- some indicating much higher or lower inflation than others. So how can anyone determine the "real" rate of inflation and how important is it to us as investors?

Calculating the "rate" of inflation matters a lot to government officials and economists. After all, mortgage rates, social security payments, GDP estimates, and many labor contracts are tied to it. But to the average person, these are just technical numbers and the official rate of inflation actually matters very little. What does matter to each of us, however, is our own personal cost of living. That is our personal inflation rate.

What it costs to live depends on a lot of individual factors. The transportation costs of a person that walks to work, takes the bus, or bikes, will be different than someone who commutes by car. The cost of heat in winter can vary a lot, depending on the weather. Some have large families and education expenses to worry about; others have young careers that have them eating most of their meals in restaurants; while some who are older require prescriptions and constant visits to the doctor. And big consumers of electronic gadgets are asking, "What inflation?" since every year, the quality of electronics goes up as the prices go down. Different lifestyles incur different "inflation rates."

Another big factor in our personal rate of inflation is what we do for work. Most general contractors, builders, construction workers, real-estate agents, appraisers and mortgage lenders have lived in a world of deflation over the last several years. The price of what they sell has been going down together with their incomes. In contrast, many who work in the export industry, agriculture, or energy currently inhabit a booming inflationary world where dramatic price increases and unemployment in the low 3-4% range are routine. So whether we are personally experiencing "inflation" or "deflation" can also have a lot to do with where we live and work.

That's not the number economists are after when they calculate inflation. They are charged with figuring out what is going on with prices in the economy as a whole. Economists also realize that prices going up in one area means prices must fall in another. There simply can't be "gasoline inflation" without consumers spending less money somewhere else. How could there be "food inflation" without prices falling on some other goods? In any evenly rotating economy, some prices are going up as others fall. Increasing and decreasing prices in a market economy is normal. It is only when we have persistent increases in money supply chasing less goods that we get progressive across the board increases in prices.

Yet with all the current talk about inflation, some may not realize that there hasn't been a significant across the board increase in inflation in 30 years. In fact, the CPI has fallen from rates of 13% in 1981 to under 2% today in what could be described as a period of progressive disinflation.

Some argue that's because the indexes measuring inflation are wrong. I have news for these folks. The indexes are always wrong. No matter which index you use, it must be wrong by its nature. An index cannot accurately measure the trillions of prices and their cross relationships, even for a single moment in time. Indexes are theoretical and work for economists who need a yardstick to compare different types of goods, services, weightings, and compensations. These indexes are subjective. You might as well explain to a man standing in 14 feet of water that the average depth of the lake is five feet. As I just pointed out, personal reality is very different from theory.

But the increases or decreases in the prices we pay for goods and the services we need are not subjective or theoretical. They are real. While economists talk about the rate of inflation, the immediate threats to most people are high gas prices, high food prices, high medical costs, or any specific price trend (higher or lower) that personally affects one's cost or standard of living.

Fortunately, there are ways to protect ourselves based on our individual price vulnerabilities. Gold and silver is one way to do this. Since gold was unfixed from the dollar at $35 an ounce in 1971, it has risen to as high as $1900 an ounce. That is certainly sufficient to compensate for any rise in prices.

But there is another, perhaps even more direct, way to protect ourselves -- ETFs. Exchange Traded Funds are indexes created to track markets or segments of the economy. And they make it possible for investors to slice and dice up industries and sectors, hedging against potential price increases or decreases that would impact their personal cost of living. Done right, we can now customize our own "personal inflation protection portfolio" using ETFs. For example, if you drive a lot and the price of gas is killing you, buy (UGA), an index tied to gasoline that will increase with the price of fuel. If food costs are your nemesis, buy (MOO), which will yield returns as food goes higher. In healthcare there is (XLV), and in housing (IYR). Both will put money in your pockets if health or housing prices increase.

Inverse ETFs such as (GLL) and (AGQ) can make it even easier to cover one's downside and protect against falling gold and silver prices or a general deflation, while (DOG) will protect you against falling stock prices. ETFs such as (TBT) will protect against rising interest rates -- and these are just a few of many, many ETFs to choose from.

There is also TIP S: inflation-proof bonds. Purchase these instead of interest rate bonds if your goal is to protect your money against inflation. You can even dial in the time frame for one year, five years, or even 10 or 20 years.

With smart tools like ETFs and TIP S, it makes no sense to blame the Fed for inflation to the degree that we did 30 years ago. The market has devised a way to protect against inflation! While everyone else is lamenting the "deceptive" nature of government inflation figures, you can select and buy the best ETFs to protect your own personal standard of living, and simply move on. ETFs may not be the perfect investment tool or hedge, but they can be part of an effective strategy to protect you from very real threats of inflation, deflation, booms and busts.

Link: http://seekingalpha....fs?source=yahoo

[cris]

Thanks Wally

So....Double leveraged, can I ask whats your percentage

at stake.....Would that be 5%?

And are you doing this with a regular brokerage account?

[WallyWeaver]

Thanks Wally

So....Double leveraged, can I ask whats your percentage

at stake.....Would that be 5%?

And are you doing this with a regular brokerage account?

Hey Cris, hope you are well.

The main thing to know about leveraging in the case of AGQ is it is...... double leveraged to the silver futures price, as stated above. What this means is if the price of silver goes up by $1, and you have a double leveraged play on silver, each share you hold goes up by $2. And, of course, conversely, if silver goes down by $1, each share you have loses $2, so there is more risk involved with leveraging.

In the case of AGQ, AGQ is generally twice the price of silver AND double leveraged. What that means is every time silver goes up $1 AGQ goes up $4, generally speaking.

Check this out: http://www.marketwat...esting/fund/AGQ

Look at the line chart in the center of the screen. Click on the 3 Year (3Y) timeline and check out what happened to AGQ in April of 2011.

Now compare that to the price of silver for the same time period: http://www.marketwat...esting/fund/SLV

SLV is a silver ETF based on the actual price of silver (no leveraging).

In April of 2011 silver hit its peak in this current bull market at just under $50/ oz. During this exact same time period AGQ hit just under $200/ share. Do you see where I'm going with this? All we need is for silver to go over $50/ oz. and AGQ will be over $200 share. As far as I'm concerned, it's only a matter of time, my friend.

....

Yes, I have a brokerage account with Charles Schwab, but any brokerage account will do (Scottrade, TD Ameritrade, E Trade, etc.). My only recommendation, if you don't have an account already, is go with the more well known brokerage houses. I shopped around and went with Schwab for many reasons, but that was my choice. AGQ is traded on the NYSE so all you need to do to get some is open a brokerage account, deposit some cash, click a few buttons, and you're in.

I am more than happy to answer any questions anyone has on any of the above information.

WW.

[cris]

Thanks very much Wally....Great article

[DinarWhiz]

Thanks to Wallys tip I invested Back in July and am Reaping Monumental Rewards Wally is the real deal. A nice fella also. Thanks again Wally I am in it for the long haul!!

[WallyWeaver]

Thanks to Wallys tip I invested Back in July and am Reaping Monumental Rewards Wally is the real deal. A nice fella also. Thanks again Wally I am in it for the long haul!!

Thanks for the kind words, DW. Glad to see you are back on the boards (it tells me you survived Sandy). Hopefully you don't have too much yard work to do....

As far as being in it for the long haul: I don't think we have very long to wait. I think at some point next year all AGQ investors will have very large smiles on their faces. I'm glad to have another rider on the AGQ train to share in the excitement.

Be blessed.

WW.