How to Profit From Inflation — Gold

The grand pappy of all inflation hedges has served as a storehouse of purchasing power for more than 5,000 years. When all else fails, the shiny stuff is the last man standing.

During inflationary times, savvy investors are looking for ways to preserve their buying power, which is why gold prices generally rise during inflationary periods.  Gold is especially sensitive to fluctuations in the dollar. As the dollar goes down gold goes up, and as the dollar goes up gold goes down.

The biggest gold ETF is the SPDR Gold Trust ETF (GLD). Each share represents 1/10th of an ounce of gold. 

If you believe that the dollar has a lot lower to go, GLD is one way to profit from it. However, keep in mind that when the U.S. dollar dropped from 2002 to 2008, gold only rose 233% vs. oil's 600% rise.

How to Profit From Inflation — Oil

As we've seen above, oil prices are much more sensitive to changes in the dollar than gold and, as such, may prove to have much more upside if you believe the dollar is set to become the U.S. Peso.

One of the best ETFs for exposure to crude is the Power Shares DB Oil Fund (DBO).

I prefer DBO over the more well-known United States Oil Fund (USO) because the guys at Power Shares do a better job hedging for contango risks that can sometimes lead to big disparities between oil ETFs' performance and actual spot oil performance.

Aside from oil being an inflation hedge, owning oil is a great play on the growth in India and China and looks to be a trend with many years left in it.

How to Profit From Inflation — Interest Rates

Central bankers' paranoia and fear over inflation is legendary.  Inflation is the monster that lurks under every central banker's bed. Out of control inflation can destroy a nation's paper wealth and topple its government. When and if inflation sets in, the only real "big gun" that the Fed has is its control over interest rates.

To fight inflation the Fed jacks up interest rates. What they try to do is restrict the availability of credit in an attempt to slow down economic growth and thereby slow demand for all items. Lower demand equals lower prices — at least that's the way it's supposed to work. 

So if you believe that inflation is coming and that the Fed will have to raise rates to combat it, there are several potential ways to profit from it.

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