What gives you the upper hand or what is your "edge" in the financial markets? If you don't know your "edge , then you don't have one and your odds are probably more like those of a gambler in a casino. If you know your "edge" and you have a slight, legitimate advantage over the rest of the market, then over time you should make money. A casino has an "edge" over their customers and with the odds in their favor they make money over time while the gambler, well... gambles.

This article does not claim to be the edge you may be looking for but we may be able to enlighten you to something most never consider. With a relatively unique perspective to consider, you may find your own edge.

Does the public and do you really understand how inflation can either destroy your financial health or make you rich? If you understand inflation you can be more aware of its impact in the financial markets and use it to your advantage.

There is a lot of controversy about what inflation is; we happen to believe it is an expansion of the money supply. However, in this article we will just focus on the effects of inflation and how to take advantage of it.

Please consider the following individual points to understand our perspective.

1. The "price" of something is a measure of both the item and the currency. It is a relative ratio. The currency is measuring the item but the item is also measuring the currency.

Above we can see that the "value" of the dollar, the measuring stick, is just as important as the "value" of the item it is measuring. But what if the unit of measure, the dollar, is constantly losing value? Wouldn't the changing value in the currency make it harder to measure investment performance and difficult to compare investment opportunities?

2. A chart of a currency can be deceiving because a currency chart is measured against other currencies. If both currencies are losing value, then they will appear rather stable relative to one another.

In the above chart we can see a 43% loss in value of the US dollar but that is relative to other currencies that may also losing value.

3. Over time, goods as well as most investments seem to go up in "price", suggesting the currency is constantly losing value and purchasing power. This loss of value in the measuring stick can create all kinds of distortions and misleading signals in the markets. Consider for a moment that assets are measuring the value of the dollar. Now look at how many more dollars it takes to purchase the same investment. That is a very real loss in purchasing power.

In the above chart we can see that it now takes over $1,400 dollars to buy the same ounce of gold that only cost $35 back in 1971. If you want a gold coin you need way more dollars to buy it now.

In the above charts we can see that the value of the US dollar has tanked relative to US Stocks as represented by the Dow Jones Index. This is another example of the US dollar falling in value relative to assets, making the assets true performance hard to measure.

4. A real world loss of purchasing power is a better measurement of the effects of inflation than a government created measurement is.

5. Removing the effects of inflation from our analysis can really help clarify what an asset is actually doing. Inflation can speed up and slow down causing the measuring sticks value to change greatly at any given time. Therefore "relative value" rather than "price" can really help us with our investment decisions.

We do not love one asset class over the other and we certainly are not "gold bugs". There is not one great asset class in our opinion. Fortunes have been made and lost on all asset classes and in our opinion it all comes down to timing. If markets are cyclical then we must try to determine when one asset is under or overvalued.

In the above chart we can see that US Stocks have been falling in value relative to Gold since about the year 2000. Perhaps the effects of inflation have made it hard to see this loss in stocks but when we compare one asset directly to another the results are clear. Since 2000 it was very profitable to weight a portfolio towards Gold.

In the above chart we can see that when we compare gold to the Dow Jones Index, in the big picture it appears that Gold may still be undervalued. Even though Gold has risen from roughly $250 to a high of nearly $2000/oz, from a long term perspective and relative to stocks, Gold appears to be undervalued.

Does the above analysis guarantee that gold must go higher? No. Does this mean that Gold is by far the best investment of all time? No. In our opinion this simply means that at this point in time, from a big picture perspective, gold appears to be undervalued relative to stocks, and capital may eventually flow from one to the other.

This is a very basic example of relative value and we have built a collection of proprietary indicators based around this concept. To learn more about our system, read more articles like this one or sign up for our newsletters, we encourage you to visit www.investmentscore.com.

Good luck!