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Tips for protecting your retirement portfolio from Inflation

Did you know that investing in precious metals was one of your best bets when it comes to protecting your portfolio against the effects of inflation?

Inflation is one of the worst enemies, if not THE worst enemy, of your purchasing power and the value of your dollar. The U.S. Federal Reserve aims at keeping inflation below 2%, but history has shown that inflation rates in the United States have often been way above this target. One thing is for sure, despite some rogue analysts have said, we will not see inflation go to 0 in our living. The Federal Reserve is interested at keeping inflation rates hovering around 2% to stimulate spending habits and create jobs.

As an example, did you know that from 1980 to 2014, the cumulative inflation rate in the U.S. was 187.3%? That gives us an average rate of 5.51% per year. This basically means that $100 in 1980 would be worth $287.3 USD today, or in other terms, $100 USD in 2014 would be worth $34.81 USD in 1980. (N.B.: we are strictly talking about the purchasing power)

Check out the table below to see the price increase since 1970 for some of the most popular products and services purchased by American consumers:

inflationtable

Why is the Gold Price Not Affected by Inflation?

Gold is not affected by inflation rates like the dollar for many reasons. One of the obvious ones is that one cannot simply “produce” gold at will. Supplies of gold on this planet are limited and until we develop the technology to go mine other planets in the solar system (and beyond!) we will eventually be confronted to a gold scarcity. Some argue that the scarcity is already happening since less gold exploration sites are being discovered every year. (see chart below)

golddiscovered

Gold value is not determined by the government

Think about this simple yet often forgotten concept: a $20 dollar paper bill is just a piece of paper that only costs a few cents to produce. The only reason it is worth $20 is because the government said so. In times of crisis or global warfare, we have seen what can happen to paper currency during the Weimar republic hyperinflation. 0000

Gold, on the other hand, has intrinsic value that can NEVER go to zero. Gold is in demand in various industries, such as electronics, architecture, aerospace, healthcare, dentistry and obviously jewellery. Gold has no borders and can be traded worldwide. In times of war, you’d much rather have an ounce of gold than $1,200 in cash.

Treasury Bonds, another Inflation-proof asset

Aside from Gold, the other type of investment that is a popular hedge against inflation is treasury bonds. The main advantage in buying Treasury bonds is that the they lock in certain returns on investment regardless of external factors. Visionary investors who bought $10,000 in 30-year Treasury Bonds in 1982, would have have enjoyed a $40,000 profit today, when the notes reached maturity with a fixed 10.45% rate. Now, you might say that the days of double-digit percent coupons may be long behind us. In January 2014, for example, the U.S. Treasury auctioned another round of 30-year bonds with just a 3% coupon. Nonetheless, such bonds, along with gold and other precious metals, cans still comprise a key element to any well-diversified and recession-proof portfolio.

Using an IRA as a tax-free way to invest in precious metals

If you go to your local gold dealer and purchase thousands of dollars worth of gold, you will be taxed by the IRS on the profits you make. This is the main reason why we recommend investing in precious metals through a retirement vehicle such as an IRA or 401k. The IRS allows tax-free rollovers from an existing retirement vehicle to a self-directed precious metals IRA. This type of IRA will allow you to invest in physical bullion coins and bars that you can store at an accredited depository. Click here to see some of the IRA and Gold dealers we recommend working with.