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If you had a 100,000 to invest and interest rates sky rocket and inflation rises dramatically where is the best place to put your money. If the rest of the world doesn’t have high inflation would gold be a good place.

2 Thoughts on If there is high inflation in the us where would be the best area to invest. Real estate, gold, china stock ?
  1. Reply
    February 12, 2014 at 12:27 am

    So just for fun, I’ll go along with this. The notion is that there is high inflation in the US but not the rest of the world.

    Real estate – Using real estate as a hedge for inflation is a tricky game. At its core is a good idea – real estate should keep its value regardless of how the USD is getting crushed. There are some serious pitfalls in using real estate to hedge if you are using credit to buy it (which is just about the only way everyone buys real estate). You have to make sure that you have the money to make payments on the mortgage. That can be tough if for example, inflation increases your expenses (including but not limited to those associated with the land) but your salary and income from the land doesn’t keep pace with inflation. If you borrow money at floating rates hoping to use real estate as a hedge, you are an idiot. On the other hand, if you take out a fixed rate loan, inflation picks up, interest rates rise, then the principal amount on the loan is eaten by inflation, you are short a bond in a rising interest rate environment and you can make tons of money. Real estate investing is complex without inflation. With inflation it can be very lucrative but is dangerous for the unwary.

    Gold – A fine traditional hedge for inflation. Gold does not have the advantage of real estate that it is easily bought on fixed rate leverage. The problems with gold are that it is tax inefficient if you hold bullion and that it is subject to valuation swings due to fashion. The land has intrinsic value – you can live on it, grow crops there, or build a highway over it. Gold goes through long periods where people just dont care about it much (e.g., early 2000’s).

    China stock – The Chinese don’t treat foreigners very well in buying their stock. China is holding $ 1T worth of US Treasury debt that would be getting devalued due to inflation in the US but nowhere else. Further, a rapidly declining US dollar relative to Yuan would cause all kinds of issues in our relationship with Chna. This might work, but you would need some expertise in Chinese stocks and have to sort out what happens to China and the Yuan from US inflation.

    Other investments –

    Short bonds – If you believe in high inflation, you can directly bet on it by shorting bonds. All the Yahoo’s on YA who buy silver rounds believing that the end of the USD is in sight don’t know that there are direct ways to make the bet that are much cleaner than buying silver over the Internet. You can do this through futures contracts, repo markets, probably some reverse ETF’s.

    Short USD in currency markets – If just the US has high inflation then USD would be killed relativee to (say) Yen. You can lever up on Yen vs USD in any number of different currency derivatives especially futures contracts and ETF’s.

    European, Japanese, Australian equities – Much easier to buy and manage than Chinese equities.

    European, Japanese, Australian bonds – Would surely appreciate in USD terms as the dollar would be getting killed against these currencies.

  2. Reply
    February 12, 2014 at 1:05 am

    Only one thing to add to the previous answer, China’s economy is still export led. If the rest of the world hits hard times then China’s exports are likely to suffer, and in turn their companies too.

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