The Threat of Hyperinflation Real or Not?

By: Sol Palha | Tue, May 18, 2010
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"Try not to become a man of success but rather to become a man of value." ~ Albert Einstein

Higher Gold and Petrol prices are one of the clearest signs that inflationary forces are gathering steam. Do not confuse inflationary forces with inflation; inflation is defined as an increase in the supply of money.

There are several reasons why inflation could become a threat in the years to come

1) Government spending is going through the roof; they seem to think that we will never have to pay this money back.

2) Unfunded liabilities for Medicare, social security, etc, add up to over $108 trillion. This is a ticking time bomb for everyone claims that our national debt is high but in comparison to the unfunded liabilities, the national debt is child's play.

3) As the Fed has dropped interest rates almost to Zero, it has very little firepower left. It could take rates to the negative level and pay people to borrow money; this will really stimulate the economy in the short run before burning it up completely. However, this option is more of a dream than a reality. The truth is that fed is almost out of options. If the economy should slow down and move back into a recessionary phase, then the only option available would be to print boat loads of money. The net result would be stagflation; higher inflation and slow growth and also the odds of entering a hyperinflationary phase would go up significantly.

Look at the price of Petrol; when oil was trading at $140, petrol was selling for $3.30-$3.50 a gallon. Oil recently did not even make to $85 but the cost of petrol is already 3 plus dollars a gallon. Based on this it would be fair to state that when oil trades back to the $140 ranges, the price could surge to the $6-$7 ranges.

Many point out that we could face deflationary scenario for years to come. Well, this might be true; there is nothing wrong with hedging yourself, that's what investing is all about. One should not bet all of one's money on a single strategy.

In an inflationary and hyperinflationary environment, commodities perform very well. Having positions in precious metals, base metals, energy, and select agricultural stocks would be a good way to protect hedge oneself. One should also have some of their assets in pure bullion (Gold, Silver, etc.). Use strong pull backs to add existing and or open up new positions.

For those who are precious metals or do not want to take the precious metal's route, one other option is to invest in TIPS and one of the ways of doing this is through iShares Barclays TIPS Bond Fund (TIP). However, in our personal opinion given the current state of affairs precious metals would be a wiser bet.

"You cannot have what you do not want." ~ John Acosta, Poet

 


 

Sol Palha

Author: Sol Palha

Sol Palha
TacticalInvestor.com

Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at www.tacticalinvestor.com.

The information contained herein is deemed reliable but no guarantee is made about its completeness or accuracy. The reader accepts this information on the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action. Any statements non-factual in nature constitute only current opinions, which are subject to change. The author/publisher may or may not have a position in the securities and/or options relating thereto, & may make purchases and/or sales of these securities relating thereto from time to time in the open market or otherwise. Neither the information, nor opinions expressed, shall be construed as a solicitation to buy or sell any stock, futures or options contract mentioned herein. The author/publisher of this letter is not a qualified financial advisor & is not acting as such in this publication. Investors are urged to obtain the advice of a qualified financial & investment advisor before entering any financial transaction.

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