After the newest stimulus package, inflation has become a clear and critical risk to the economy, causing everyone to ask about a good market hedge right now.
And many are turning to the most famous safe-haven asset: gold.
But that’s not what investors or traders should be asking. It’s this:
“What’s the best hedge for gold in an inflationary market?”
You heard me right. Gold has lost its glimmer.
Gold prices are falling into a bear market pattern we haven’t seen since 1979. This down period lasted until 2000, when gold was in constant decline, dropping from $1,500 down to $390.
Its other bear market was from 1934 to 1970, dropping from $700 to $250 levels.
And while the S&P 500 has rallied 5% year-to-date, SPDR Gold Shares (NYSE: GLD) shares have lost 9% in the same time period.
Signs of inflation are presenting themselves more strongly than they have in recent years. Interest rates’ sudden jump to 1.6% has inflation bulls rattling the market’s nerves, and right now it’s critical that you prepare your wealth for what might unfold.
So, let’s take a look into the past.
Years of data reveal two simple investments that prosper during inflations…
If you’re into technical analysis as much as I am, you can’t help but notice some similarities between the price of gold today and the trend that emerged in 2013.
We saw the S&P 500 and gold part ways in performance during that period as stocks continued their recovery from “the Great Recession,” and interest rates doubled to 3% (the Ten Year yield).
Sounds awful familiar to today’s playbook, no?
GLD shares just came off of another historical crescendo move at $200, and are now breaking into a long-term bearish trend. My target for gold sits at $140 as the GLD trades around $165.
This leaves a problem for everyone trying to hedge away inflation risk with gold.
Things get more interesting when you factor in the rising dollar.
While we have seen weakness in the dollar through 2020, the longer view of the greenback is relatively bullish according to the trend in the DB US Dollar Index Bullish Fund (Nasdaq: UUP).
So, let’s get back to our question, “How can I hedge this market and inflation when gold appears to be slipping into a multi-year bear market?”
There are two easy ways you can hedge for inflation and get robust profits.
The first way is by investing in commodities, specifically the DB Commodity Index Tracking Fund (Nasdaq: DBC).
This ETF holds a “basket” of commodities including energy, precious metals and agriculture products. The broad-based approach gives you a portfolio of inflation-sensitive products in one simple investment.
DBC uses commodity-based futures contracts to invest their portfolio, and shares just broke into a long-term bull market trend as they’ve posted two closes above their 20-month moving average. That 20-month is also rising, which adds to the momentum of this inflation hedge.
Year-to-date, shares have added 17.6% to their return, more than doubling the S&P 500 and matching the small-cap iShares Russell 2000 ETF (Nasdaq: IWM) performance.
As a matter of fact, you’re hard pressed to find a growth ETF that has performed with as little volatility as the DBC shares – they’re trading at about 40% the volatility of the major market index ETFs right now.
That means you get twice the performance of the S&P 500 for half the volatility.
A great trade-off.
The rebuild and reinflation economy will continue to drive demand for all of these commodities through 2021. This one-stop ETF gives foundational growth potential to your portfolio while hedging away inflation risk.
My recommendation is to hold the DBC shares as a hedge against inflation and rising commodity prices while still giving you light exposure to precious metals like gold. It’s an all-in-one hedge.
Chris Johnson’s Inflation Hedge #1:
DB Commodity Index Tracking Fund (Nasdaq: DBC)
Want to be a little more aggressive against inflation and the weakness in gold?
Bitcoin (BTC) has clearly been taking the place of gold for many investors as we see inflation rearing its not-so-ugly head. Remember, the bump we’ve seen in inflation is similar to what we saw in 2013, when the S&P 500 and other indices held their strong bull market trend.
BTC has a dual effect fueling its recent rally.
First, the future alternative to currency is being adopted as an inflation hedge, an alternative to gold. In some cases, there are even a few cryptocurrencies that are backed by gold, but we’re trying to stay away from falling gold prices for now.
Second – and more powerful – is the “acceptance phase” that cryptocurrencies are going through.
The acceptance phase of the rally of any asset, stock, sector, or market is typically the strongest. This phase comes after the initial speculation as the main public begins to adopt the technology, in this case a currency.
During BTC‘s speculation phase, it went from $1,000 to $20,000.
These two factors make BTC and its associated assets an alternative, more aggressive, hedge against inflation and lower gold process.
A few weeks ago, I gave you the bullish technical analysis of BTC and Riot Blockchain, Inc. (Nasdaq: RIOT) in a chart that nailed the bottom for these crypto plays, giving you the opportunity to get in ahead of the recent 60% rally.
Shares of both have pulled back and it’s time to watch these aggressive hedge trades bounce higher once again.
For my money, the easy trade here is to buy and hold the Grayscale Bitcoin Trust (OTCMKTS: GBTC) using a limit price of $47.50 with a target of more than 30% profits over the next quarter.
Chris Johnson’s Inflation Hedge #2:
Another way to invest in cryptocurrency is by listening to my colleague, Tom Gentile. He’s what I’d call an expert in the space – I mean, his Microcurrency Trader readers have had the chance to score three 100%-plus gains since this past weekend. To learn how you can join them, and receive exclusive crypto trading recommendations straight from Tom, click here.
Until next time,