Inflation is a complex subject, but its effect is easy to see. Over time, the same amount of money buys less. A $20 bill in 2023 buys the same amount of goods and services as $12.10 bought in 2003.
Regardless of the causes of inflation, this erosion of buying power is of crucial importance to anyone saving for the future. You must consider not only how much money you have now, but how much of its buying power will be silently consumed by inflation in the years ahead.
Financial planners and investment advisors often recommend a number of investments as “hedges” (protection) against inflation. These so-called hedges typically do one or more of the following:
- Their market value is adjusted to compensate for inflation
- Their growth historically matches or outperforms inflation
- Their intrinsic value simply isn’t denominated in dollars, so their prices tend to rise in lock-step with inflation
In this guide, we’ll review a selection of investments most often recommended for their inflation-resistant characteristics and discuss their pros and cons. We’ll also provide an overall rating from 1 (poor inflation resistant investment) to 5 (optimal inflation resistant investment).
Table Of Contents
- Commodities
- Livestock
- Real estate
- Collectibles
- Savings account
- Bank certificates of deposit (CDs)
- Physical gold
We’ll begin by looking at commodities, which can encompass a wide range of goods.
Commodities
Commodities such as crops often benefit from rising inflation, but in an unusual way. Commodities have intrinsic value and are traded on the open market. When the buying power of a dollar goes down, that dollar buys less — and therefore, the price to buy a commodity goes up. This makes a good hedge against future inflation on their own. In illustration of this, Goldman Sachs is calling the 2023 commodities market the most bullish since 2020.
Commodities can vary widely in their performance on the market in response to consumer and industry demand. With that in mind, which commodity you invest in will determine your success with this category.
Technology is a big driver of commodities demand, with lithium being the best selling commodity in 2022 in part due to the demand for electric cars. Over the past 30 years, palladium has reigned with a 8.11 percent annualized return (as of 2023), followed by gold at 5.37 and silver just behind at 5.27. Natural gas is among the worst performers in that timeframe with a -12.70 percent annualized return.
Of course, past performance is not an indicator of future performance. For example, demand for natural gas is steadily going up on a global basis (as the chart from the International Energy Agency shows), and it is a finite resource. The covid pandemic caused demand to plummet, however, and that affected long term performance for this particular commodity.
Pros
- One of the very few asset classes that benefit from rising inflation
- Potential for short term profit
- Wide selection of investment opportunities you can tailor to your preference
- Commodities that are useful in new technology tend to be strong performers
- Demand for commodities in general is on the rise as the world industrializes
Cons
- Different commodities perform wildly different, in part depending on demand
- Public pressure to pivot from specific commodities, natural disasters, and diplomatic tensions can all affect long term performance
- Can experience long periods of decline before showing growth
- High risk due to market volatility
Final Rating: 2/5
With the potential for short term profits drawing many people into commodities investment, it can be helpful to understand that going into it as a long term investment will be more profitable in the long run. Commodities can be highly volatile in the short term, so if you’re looking to get in and make some quick cash, you might not find your opportunity as soon as you’d like. With that said, the popularity of precious metal commodities such as palladium and rare earth such as lithium can’t be denied – and for good reason. Technological developments are constant around the world, and specific commodities are a part of many of them.
Even still, the volatility of commodities in general prevents this category from scoring any higher as a hedge against inflation. There’s one exception to this rule – gold – but we’ll get to that later on.
Livestock
One of the most popular categories for hedging against inflation is that of livestock, which refers to cattle or any other form of farm animal (including poultry, pigs, and even farmed fish). People will always need to eat, and the livestock industry is a common way for making sure that happens. Because of this constant demand for food, along with the rising purchasing power of populous nations such as India and China, the livestock industry is a reasonable choice for protecting your investments from inflation.
Getting into livestock investment can be as simple as buying calves, lamb, or chickens, paying a farmer to raise them, and then selling them when they are at a harvestable weight.
The main concerns with the livestock market are the potential variabilities in demand. People who are concerned about inflation will eat less meat, for instance. There’s also a growing market of artificial and lab-grown meat that is directly competing with this category. In some countries, including the United States, vegetarianism is on the rise.
With that said, beef in particular is strong this year, but that’s only after the worst culling the herds have ever had due to drought conditions.
Pros
- Livestock is an excellent source of food, and demand is nearly always constant (except during times of inflation and reducing spending power)
- Spending power for highly populous nations such as China and India is going up, meaning there is a growing market for meat
- Predictable turnaround time for investment (based on the animal’s life cycle or ability to produce milk or eggs)
Cons
- Possibility of price crashes due to diseases such as mad cow disease or bird flu (or you may lose your livestock directly as a result of them)
- Drought can affect returns, and extreme drought may lead to loss of animals
- Artificial and lab grown meats are competitors that are gaining an increasing share of the market
- Some populations are becoming increasingly vegetarian, lowering demand
Final Rating: 3/5
Cushioned by the constant need for food and the growing demand in rising markets, livestock investments are a reliable way to hedge against inflation. Because the profit cycle is based on the lifecycle of the animal along with their production ability, livestock investment can be a steady source of income. However, the increasing volatility of environmental conditions (leading to more drought), the possibility of disease, decreasing demand in some markets (including the United States), and the presence of more environmentally friendly competitions, livestock investment still comes with significant risk.
Real Estate
Along with food, real estate is one of the most common in-demand products – making it a great option for hedging against inflation. In 2023, the real estate market is red hot as housing inventory is low in many places, rents are getting higher, and large populations are migrating away from coastal flood zones. All of this translates into real estate’s best advantage: it’s in demand.
Buying a house at a lower cost, repairing or rehabilitating it, and then selling it at a higher cost is a simple way to get into the real estate investment market. But that’s far from the only option.
We already discussed how popular livestock is right now, with a growing demand foreseen due to the purchasing power of developing nations. That livestock needs a place to be grown, and that’s where farmland comes in. You can buy land, convert it to farmland, and then sell or lease it to farmers as one way to take advantage of that potential.
The most expensive investment option here – but the one with the most possibility for a big return – is to take undeveloped land and turn it into commercial or residential properties (which you then rent, lease, or sell).
With all that said, the real estate category comes with some hefty risks. For one thing, the purchasing ability of the buyer is often dependent on interest rates, which are under government control. Materials for building or repairing real estate may suddenly become difficult to obtain or too costly to obtain, causing the project’s budget to explode. Finally, if you do find yourself in need of liquidating your property, you may find it difficult to do so (especially if the market has turned down).
Pros
- Potential for a big return if you acquire property inexpensively, develop it from the ground up, and then sell it for a large profit
- Housing inventory is historically low around the world, creating high demand
- Farmland can be a great option due to burgeoning livestock market
Cons
- Housing and real estate market can be volatile due to interest rates and overall economy performance
- Supply and cost of materials could suddenly change
- Difficult to liquidate
Final Rating: 3/5
Even with the high demand that we’re currently seeing in the housing market, the real estate category isn’t without its risks. During covid, we saw how the supply chain was affected, driving the prices of materials sky high and causing some projects to fail altogether. Investing in real estate can be expensive, and you might find yourself unable to liquidate it when you need to.
Collectibles
Collectibles is a decent category for hedging against inflation as it incorporates items that come with a strong and persistent nostalgia factor. Trading cards, comic books, and classic cars are all part of this category, along with jewelry, fine art, and high dollar wines.
Rarity is the driving factor behind demand for this category, and one benefit of that is the rarity of vintage goods is always going up as items are removed from circulation, lost, or destroyed. Unusual coins, first edition comic books, or paintings by deceased artists are all prized examples of what collectors are looking for.
The primary factor that prevents collectibles from being a winner all around is that they are considered luxury items. People who are struggling to feed themselves due to high inflation are less likely to be keen on purchasing the early issues of Spiderman or a 1957 Corvette.
Pros
- Jewelry, fine art, and wines can fetch a high profit
- Historic or vintage collectibles are becoming increasingly rare, driving value
- Persistent nostalgia factor keeps buyers coming back to this category, contributing to demand over time
Cons
- High risk during periods of financial stress as fewer people seek to buy luxury goods
- Not ideal for short term profits due to being dependent on overall economy and inflation
- Counterfeits are a risk
- Additional costs for storing and transporting
Final Rating: 2/5
If you already possess collectibles, it’s a good thing, and you should wait until the market is lively to fetch the best price for what you have. If you don’t, you should weigh getting into the collectibles market with the knowledge that they are considered to be luxury goods, and people will be buying far less of them when they are feeling financially stressed. Being a collectibles investor means that you’ll need to be prepared for paying extra to secure and store your items, even when the market is low for an extended period of time.
Savings Accounts
It may sound simplistic, but a savings account at a brick and mortar bank is actually not a bad option for hedging against inflation. Consider this: anything you deposit into the account comes with a steady rate of return, it’s FDIC insured, and you can start with a minimal amount of money (as low as $1). With that said, if inflation is aggressive, and savings returns are low, you won’t be making anything by having your money in a savings account. Even still, it can help to have one ready to liquidate when contending with rising prices.
Pros
- Potential for constant interest gain
- Savings accounts never need to be liquidated as they are already liquid (you won’t have to worry about waiting until a specific market condition to access your funds)
- FDIC insured
- Minimal startup cost
Cons
- The rate of return can be very low – the national average for 2023 is just 0.36 percent, going up to just over 2 percent for some types of accounts
- Interest rates can change without your consent, meaning you’ll be making even less
- You cannot withdraw from the account more than six times per month due to federal rules
- As a cash asset, it can be tempting to access early and prevent better interest gains due to a lower balance
- Inflation may take more than you make
Final Rating: 1/5
Even though savings accounts offer the potential for constant earnings from interest, the return can be very low (and you have no control over it). It’s entirely possible that during time periods of high inflation, you’ll actually be losing money by parking your investment in a savings account. With that said, savings accounts are incredibly accessible due to being liquid cash, and they have a minimal startup cost.
Bank Certificates of Deposit (CDs)
Certificate of deposit (CD) accounts function similarly to savings accounts in that they’re held at a bank and can accrue favorable interest for you. They’re different in that they come with set time stipulations (short or long term) to enable the CD to achieve maturity before it is accessed. In other words, it’s like a savings account and can make you money, but you can’t access it until it is fully matured. The maturity time period can range from 28 days to 10 years. On the upside, the interest rate for the average CD in 2023 is between 4 and 4.5 percent.
On the downside, you won’t be able to access your funds before the maturation date unless you’re prepared to pay a fee in most cases. However, if you “ladder” your investment by taking one amount and spreading it across CDs with different maturation rates, you’ll be able to access some of your funds sooner.
Pros
- Capable of generating higher interest than most savings
- Reliable returns to the point that you’ll be able to estimate your account growth
- You can “ladder” your investment across multiple accounts to access at different times
Cons
- If you take the money out of your CD before it matures, you may be penalized with fees
- May not keep pace with inflation
- Less liquidity than savings account
Final Rating: 2/5
With a higher potential yield, CDs are a stronger option than savings accounts, but they still have the capacity to be overtaken by inflation (meaning you’ll be losing money by investing in them when inflation is high). As an added downside, they aren’t nearly as accessible as savings accounts, and you’ll be penalized with a fee if you withdraw before they’re mature in most cases.
Physical Gold
The last item on our list might be the most inflation-resistant. We have already talked about how gold is an ideal commodity to act as an inflation hedge, and there is no better way to take part in this asset than to own it directly.
By owning physical gold, you take ownership over the precious metal. You, therefore, don’t have to be concerned about the security of a bank’s storage facilities or the high fees associated with purchasing a gold ETF. There is always a market for physical gold, so buying and selling the commodity doesn’t have to be complicated.
The primary reason physical gold isn’t in more savers’ financial plans is they simply don’t know it’s an option.
Pros
- Highly liquid
- Readily available
- Gold itself has intrinsic value and is a globally recognized store of value
- Physical possession and private ownership
- For some types of physical gold (proof and numismatic coins), there are opportunities for capital appreciation
- May enjoy periods of overperformance based on demand, industrial use, mining production, etc.
- Over long periods, price movements are negatively correlated with the stock market and positively correlated with inflation
Cons
- Not directly indexed to inflation
- Short-term price movements may correlate with stock market movements (when investors panic and sell everything, they sell gold, too)
- May suffer periods of underperformance correlated with low inflation periods
- Storage and insurance costs
Final Rating: 5/5
There’s a reason physical gold has remained the gold standard for inflation-resistant investments over the decades. By privately owning the precious metal, you can control your wealth in a universally accepted commodity as a store of value. Over the long haul, gold is one of the only investments that reliably resists inflation, has zero counterparty risk, and can insulate your savings from a variety of bad economic conditions beyond inflation.
