11 June 2008

Coping with inflation

I've not been shy in the past about posting observations and warnings about monetary inflation and its deleterious effects, so it's only fair that I offer at least one strategy to consider for coping with it.

The chart above is for the T. Rowe Price New Era Fund (symbol PRNEX), a mutual fund with the interesting strategy of investing in natural resource stocks. The portfolio is heavily weighted with oil and natural gas companies, including drillers and equipment, but also includes precious metals, nonferrous metals, chemicals, coal, forest products, fertilizer, etc.

When a country is experiencing inflation (or a devaluation of its currency), natural resources are the types of products which tend to "inflate." Stocks in relevant companies tend to do better than consumer, banking, finance, and similar categories. The chart above shows the performance of PRNEX for the past five years, compared to the Dow-Jones Industrial average, the NASDAQ, and the S&P 500 index.

Now for the caveats. It's been a nice ride which I personally expect to continue for another year or two because I think the U.S. dollar will continue to weaken and inflation will accelerate. If things get too bad, however, a deep recession will cut demand even for natural resources. I'm not recommending that any reader of TYWKIWDBI invest in this mutual fund, but it may be useful to know that this fund (and others like it) do exist.

Update January 2009: In retrospect, my enthusiasm for a commodity-based mutual fund as an inflation hedge was disastrously premature. The recessionary environment for the balance of 2009 resulted in a historic drop in commodity prices, and brought the PRNEX fund back to levels it was at 5 years ago. It's still a good investment tool if (when) inflation rears its ugly head.

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