Bitcoins, Love and Global Plays

Editor’s Note: Richard Stavros is an investment analyst at The Inflation Survival Letter as well as at other affiliated publications under the Investing Daily umbrella, including Personal Finance and Utility Forecaster. Here, he provides his interpretive analysis concerning the inflation threats now faced by investors like you.

The 21st Century investment universe offers many new potential ways of protecting against inflation than was unavailable in the 1970s.

The last time America experienced high levels of inflation was the 1970s, when there were very few inflation protection options for investors to choose from. But today there are all types of potential ways that investors can preserve wealth, from highly conservative, low-risk inflation protected Treasuries, to the bleeding edge of technology, such as high risk investments in digital or crypto-currencies, called Bitcoins.

In fact, the new investment universe has inflation protection options for almost every type of investor risk-profile. Here we highlight three recent investment opportunities and their suitability.

1. Bitcoins: The Stamp and Coin Collections of the 21st Century?

During past inflationary periods, investors dedicated small portions of their portfolios to art, stamp and coin collecting as a way to preserve value. Alternative investments such as these have always been a key inflation strategy to preserve wealth. That said, they represent high risk and should only contain amounts that investors can afford to lose.

Predicting the value of these investments involves a sensibility about future cultural tastes, preferences or idiosyncrasies that even the world’s top art, stamp and coin appraisers sometimes have difficulty divining, much less the average investor.

Within this context, we reviewed the advent of the digital, decentralized currency known as Bitcoin in a report entitled, “Bitcoins: D! eciphering Their Value.”

Our conclusion was that Bitcoins themselves in their present state of development aren’t suitable as an investment or inflation hedge, but there are ways for investors to play this trend via established companies. Internet companies that accept Bitcoins as a system of payment are your best bets.

2. Love as an Inflation Hedge

The diamond industry’s multi-decade marketing campaign changed the institution of marriage forever, by equating love with the enduring perfection of a diamond. In the process, jewelers have reaped plenty of gold by exporting this concept to the world. And thereby, an inflation hedge was born.

From 1939 to the 1990s, the share of brides receiving diamond engagement rings in the US grew by 80 percent, according to a 2011 study of the diamond industry by Bain & Co. This success was later replicated in Japan, where from 1966 to 1990 the share of brides receiving diamond engagement rings jumped 77 percent.

More recently, explosive growth in China and other emerging markets countries has allowed diamond retailers to make substantial headway in those markets, as the growing middle class and elite embrace luxury goods. In fact, diamond retailers showed their resilience during the latest economic crisis—and now they’ll prove an effective hedge during the inflation that we see coming down the pike in 2014.

During the 2008 financial crisis, individual jewelry markets performed in different ways. In India and China, the decline was not significant. From 2007 through 2009, these two markets increased their share of the global jewelry market from 28 percent to 35 percent.

In fact, we concluded in our report “Love as an Inflation Hedge,” that high-end jewelry companies are able to pass along costs during inflationary environments, particularly when love is in the air in the spring and summer months.

3. Global Markets Plays

It was once very difficult for the average ! investor ! in the 1970s to play emerging markets and commodities as a way to hedge against inflation. But today it’s as easy as buying a stock. And in our report “Managers Go Big On Inflation,” we found that money managers are increasingly focused on global markets as a way to hedge against inflation.

To combat inflation, bond fund PIMCO advocates commodities that have two characteristics: 1) They’re geared to global growth, and 2) There are supply constraints.

The two commodities that they feel fit this criteria are crude oil and copper. “Both of them are strongly connected to global growth and emerging market growth in particular. And both have significant supply constraints such that, if demand growth continues at the same pace for the next couple of years as it has been, we could see significant supply shortfalls,” the PIMCO managers argued in a report.

But other fund managers are focusing on the one metal that has been historically a safe haven to preserve wealth during inflationary periods—and that’s gold.

On Jan. 16, gold advanced for the first time in three days after a government report showed the cost of living in the US increased by the most in six months, boosting the appeal of the precious metal as a hedge against inflation.

In terms of emerging market holdings, investors are diversifying their portfolios in droves to emphasize safety or fixed income rather than growth. Emerging market fund investors poured money into bond portfolios and cash while selling equities in the first full week of 2014, in contrast to the apparent start of the “great rotation” at the beginning of last year.

In fact, since the start of the year, emerging-market sovereigns have sold almost $19 billion of bonds, three times what was sold at this stage last year and the fastest start to the year since Dealogic started compiling records in 2000.

With respect to bond funds, bond data provider EPFR Global found European bond! funds be! nefited from their largest inflows since late April 2013, and emerging markets local currency bond funds broke a 14-week outflow streak to capture new money.

Most inflation protection investments such as real estate are not as glamorous as digital currencies, the global diamonds business or commodities. However, these new innovations are allowing investors greater portfolio diversification and wealth preservation, which is the name of the game.

To learn more about inflation and how you can take steps to protect your finances and grow your wealth, subscribe to our advisory, Inflation Survival Letter.