Is It Time to Worry About Inflation? Some Investors Think So

Stocks have been on a tear recently, recovering much of the ground they lost in March, but there are other investment segments that are doing well, and there’s one big reason – worries about inflation.

Investors are pouring money into gold, forests, property stocks, and inflation-linked bonds as they worry that the recent explosion of government spending and central bank stimulus may finally rouse inflation from its decade-long slumber.

That would be a surprise to the official inflation measures in the U.S. and in Europe, both of which have been trending lower. Officials forecast that prices won’t rise more than 1% or so for at least a year.

But investors think that officials have it wrong this time. The differences between now and the years after the Great Financial Crisis are the size of the global government response and the speed at which the stimulus money is reaching the markets.  In the U.S., the Fed is on track to create as much money in three months as it did in the seven years after 2008.

PineBridge Investments’ head of multi-asset Mike Kelly, who has been buying gold, said:

“We will be pushing, pushing, pushing on the string and dropping our guard, then 3-5 years from now…that’s when the (inflation) dog will start barking. Gold worries about such things long in advance. It has risen through this coronavirus with that down-the-road-risk top of mind.”

Klaus Kaldemorgen, a portfolio manager at asset manager DWS, echoes a concern of many investors when he discusses the limit, or lack thereof, on government spending.

Kaldemorgen said:

“What worries me is that at the moment it seems that there is no limit to fiscal stimulus.”

To get ahead of inflation, investors have been buying gold, which is up 18% since the end of March, and inflation-linked bonds.  The TIPS, or Treasury Inflation-Protected Securities, are up 12% since March. Other inflation hedges include natural gas, copper, oil, and wood products.

With the Nasdaq reaching record highs even as U.S. GDP is expected to come in at -40% for the second quarter, maybe it makes sense to protect some profits and buy a little bit of an inflation hedge.

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