Never mind the CPI number reported by the government (at around 3%), the real inflation rate is somewhere around 10% (using the SGS 1980-based methodology found at ShadowStats.com). That’s high inflation. And it’s likely to go higher as the Federal Reserve accelerates its money printing in further attempts to kick start the U.S. economy and finance the ever increasing national debt—the national debt is growing exponentially and is now on the vertical side of the slope (going past the “knee” some time in 2008; see Be Financial Cycles Educated). Although a little dated (February, 2011), these economic charts illustrate the ongoing problem.
If history is any indication, a massive inflation spike or possibly a series of intense spikes is in our future. It will destroy the life savings of millions. But you don’t have to be one of them. There is, in fact, a way to benefit from it.
The idea is to implement an arbitrage by going short financial assets and going long tangible assets.
The short is to hold a fixed interest rate loan on real estate property with these characteristics:
- Income-producing. The ideal property is income-producing (e.g. rental property) or with the potential to appreciate in an inflationary environment, such as farmland or land with mineral rights and a potential energy play (such as oil or gas). However, any real estate property will benefit from this strategy.
- High LTV (loan-to-value). A recently purchased home or refinanced loan will work.
- Longer term, fixed-rate loan. A 30-year fixed rate loan is the best.
The long is to hold a proportionate amount of tangible (i.e. non-paper) assets that will appreciate in nominal dollar terms (not adjusted for inflation) during the inflationary period. The two obvious candidates are petroleum and precious metals. However, for most people, obtaining petroleum assets of any significance is beyond their reach. When it comes to precious metals (i.e. gold and silver), they should be in your physical possession—if you don’t hold them, you don’t own them. Store them in a gun safe (bolted to the floor) or bury them two feet or more below the ground and do whatever you need to safeguard them. Having multiple storage locations is the best approach.
So here’s what happens with the arbitrage. Each year that the dollar devalues through rampant inflation, the value of your loan decreases, while the value of your gold and silver increases. Let’s take an example.
Suppose you get a 30-year, fixed rate loan of $200,000 on a $250,000 home (i.e. your down payment was $50,000). At the same time, you purchase $100,000 in gold and silver coins (American Eagles work the best). If the inflation rate is 15% and continues for the next five years, the value of the dollar will have dropped by about half (from $1.000 to $0.522 to be exact), and your gold and silver should have appreciated (in nominal terms) to double its original purchase price. Thus, after five years, two things will have happened:
- The loan has lost half its value (in real dollars). You are paying the same monthly mortgage in nominal dollar terms, but in real dollar terms (i.e. inflation-adjusted dollars) you are only paying half the amount, since the value of the dollar has been cut in half.
- Precious metals have doubled in value (in nominal dollars). At the same time, your gold and silver should have doubled in nominal dollars. You then have the luxury of paying off the loan, if you so chose, and have money left over.
You win on both assets through the inflation crisis, a kind of one-two punch.
Further insights into this approach can be found here: Deadly Dow 36,000 & The Secret History Of A 70% Market Loss.