Hello, Inflation

Some investors are licking their chops waiting for the Fed to cut loose with higher interest rates to contain inflation. Some remember the high interest rates from the Carter days and can’t wait to lock in those double digit safe yields. But what happens if inflation does arrive but double digit safe CD returns do not?

Why there is always gold, some talking heads say. The problem is gold like someone you meet on an internet dating site may not be all that it claims to be. The nasty little problem with gold is that it doesn’t offer any income. You may buy it and find it out later it’s a couch potato – it just lays there and doesn’t do much at all. Because gold doesn’t work like other investments it may be less attractive as interest rates rise.

Okay, you say, but the last time out agricultural commodities did extremely well. Yes, they did but remember there were less commodity players in the sandbox the last time inflation hit than there are today. Today’s commodity investors resemble hit squads who take no prisoners. It’s a far different game then buying a mutual fund.

While commodity funds do increase in value when inflation arrives there is a certain situation that can quash the profits called contango. Because agricultural commodities are perishable the funds buy derivative investments such as futures contracts instead of buying the actual railroad cars of soybeans or corn. Contango happens when the futures price is higher than the current spot price for a certain commodity. When that happens fund managers are stuck selling expiring contracts at lower prices and buying forward contracts at higher prices. The fund effectively, according to Bradley Kay, an ETF analyst at Morningstar, is always selling low and buying high.

Sometimes investors confuse an ETN, exchange traded note, for a Exchange Traded Fund, which pose different risks altogether. ETNs own nothing. They are promissory notes issued by the organizer supposedly backed by hard assets. If the fund or bank that issues the ETNs fails, which may have nothing to do with the investment. investors are out of luck. ETFs, on the other hand, generally own the security or assets.

There you go, dear reader, some of the really bad things that can happen when you think that you can make a bucket of dough when inflation hits and there are a thousand different and new ways you can lose money.

If you have questions about this blog call Paul at 877 783 080 or write him at pstanley@westminsterfinancial.com. Refer this blog to someone who cares about money.