Investing to Protect Against Inflation

American investors have had to learn about inflation over the past five years. The last time inflation was big in the U.S. was the early 80s. More recently, we have dealt with disinflation and even deflation.

How to Measure Inflation

The most common measurement of inflation by the U.S. government is the Consumer Price Inflation index (CPI). Food and energy costs tend to be volatile, and the government releases this data without them, "core CPI". Here is the CPI index over time from the keeper of the index, the Bureau of Labor Statistics:

Inflation shot up during the pandemic, but it is lower now. It went negative in 2008.

The Federal Reserve Board, which oversees Fed Funds, uses a different measure, the Bureau of Economic Analysis Personal Consumption Expenditures Price Index. It is more stable.

Inflation Outlook

With the unemployment rate so low, many fear inflation. Some feel like the pandemic is over, but the weakening US dollar has raised some concerns, as have the tariffs. Jerome Powell, the Chairman of the Federal Reserve, which has cut rates a lot over the past year, is concerned about inflation remaining above the Fed's target of 2%. The current outlook among economists is that it continues to be lower than it has been in recent years, but above the 2% Fed target.

Types of Investments to Deal with Inflation

Historically, gold has been viewed as the best inflation hedge. In my life, this really goes back to the 70s, when President Nixon removed the fixed price of gold, and gold soared (as did inflation). I look at gold (again) but a lot of other types of investments as well.

Commodities

In 1991, Goldman, Sachs launched the first major investable commodity index, GSCI. It gives exposure to a broad range of commodities, including energy, industrial and precious metals, agriculture and livestock markets. It is now run by Standard & Poor's, which acquired it in 2007. The data for the index goes back to 1985, and it has increased, but really not that much. At 555.11, it is up slightly in 2025. It is up about 208% over the past 40 years or so.

iShares runs an ETF, the iShares S&P GSCI Commodity-Indexed Trust (GSG) that was launched in 2006. The ETF has $1 billion in net assets. I do discuss energy and precious metals below. GSG has not been a good investment since the launch:

In 2025, it is up 4.2%, and over the past 5 years it has increased 115.6%.

Gold

As I said above, President Nixon made a big change in the rules for gold. Previous to his rule change in 1971, gold was fixed at $35 per ounce. According to the Federal Reserve website, this was due to a looming gold run and inflation. I was only 6 years old at the time and don't remember this. Gold, which is now floating all around the world, put in a record all-time price recently that is much, much higher than $35!

There are lots of ways to measure the price of gold, including the "spot price" and the futures on the Comex, which are both above $3300. Here is the long-term chart of the gold price and the S&P 500 going back to 1978:

The way I track gold is the SPDR Gold Shares ETF (GLD), which is managed by State Street and has net assets of $102 billion. The price of GLD is not the price of gold, but the liquid fund that trades near its NAV is a good way to track changes in the price of gold.

GLD has soared since its inception:

Of course, this has been a period of low inflation. More recently, inflation did pick up a bit. Of course, gold can move for other reasons, but since the end of 2019 (ahead of the pandemic), GLD has more than doubled. Stocks were crushed in early 2020 after the pandemic hit, but GLD rose:

For those who want to bet on gold to protect against inflation, it has already gone up a lot, making this a potentially bad bet.

I am negative on gold, but my bet against it is the gold miners. I wrote negatively about VanEck Gold Miners ETF (GDX) on Seeking Alpha on May 10th, suggesting that readers consider exiting. I am very long GDXD, an inverse leveraged ETF currently. I have not been long GDXD the entire time, as I explained here very recently. Since 12/21/19, GDX is up almost as much as GLD:

In 2025, GDX (+54.5%) is up a lot more than GLD (+27.7%).

Money Market Funds and Short-Term Treasuries

One of the worst ways to invest during inflationary times is long-dated Treasury bonds ( or other debt). It's basic math that the longer the maturity, the more the price can change when interest rates change, and rates go up when there is inflation. The best way to invest in an inflationary environment is cash or short-dated maturities, as the price-risk is very low and the reinvestment will get better and better while inflation persists. The trick is to extend one's maturity at the appropriate time!

Looking at the the total return of a big money market fund, the Vanguard Federal Money Market Fund, compared to gold, it has trailed gold since 1981, but it was ahead for a very long time:

I have heard something for a long time: Cash is trash. This has been true at many times, but I think the current environment is good for investors having a high cash balance. Rates seem high to many but low to many too. The current Fed Funds range is 4.25-4.50% since December. Here is the Fed Funds rate over time:

I can see how many, especially younger people, see the current rate as "high", while others, like me, who are older remember how high they got when Ronald Reagan was President. His Federal Reserve Chairman was Paul Volcker, who died in 2019, and he served in that role from 1979 to 1987. Yes, Jimmy Carter appointed him and Reagan reappointed him, and Volcker fixed the inflation problem by raising interest rates.

So, what is the right Fed Funds rate? I think that is a challenging question that depends on what inflation will do. Our current unemployment rate is very low, and inflation is above the 2% target of the Federal Reserve. Investors seem to be expecting the Fed to cut rates again based on the Treasury yield curve, which is inverted in the front-end, with the 5-year Treasury yielding less than the 2-year. Here is the current yield curve:

This data suggests that the Treasury securities of 5 years or shorter, have yields that are below the current Fed Funds range, while the 10-year and the 30-year trade above it. Interestingly, the 30-year has increased by 0.59% over the past year, while the 2-year has declined (along with Fed Funds falling) by 0.56%.

For those who want to protect against inflation, shorten your bond exposure or sell stocks and move to cash!

Oil

I am a Texan, and I should have a lot to say about oil, but I don't. Oil prices shot up when Russia and the Ukraine began fighting, and they recently lifted when the U.S. attacked Iran. I think that rising oil prices can lead to inflation, but there are lots of reasons for oil prices to change. I don't think that inflation is necessarily one of them. The S&P has a GCSI Crude Oil index, and it has performed very poorly since early 2011:

Precious Metals

I discussed gold above, and it is a precious metal, but not the only one. It is a lot more expensive than other precious metals, though. The other precious metals that attract speculation include palladium, platinum and silver.

Here is the price action for all of these since the 2/28/11, when the GCSI started releasing this data:

More recently, silver has surged. I published an article on a TIPS fund in early February at Seeking Alpha, and I was suggesting TIPS over gold. Since that article, gold as measured by GLD, has increased a lot, but silver, as measured by the iShares Silver Trust (SLV) has increased more:

Since April 7th, SLV has gained 29.1%, beating the jump in GLD, 12.9%, by more than 100%. SLV is up 33.0% in 2025 so far, ahead of the 27.7% gain in GLD. Even over the past 5 years, SLV, up 97.6%, is ahead of GLD, up 82.5%. I can't get on board!

Real Estate Investment Trusts (REITs)

Real estate prices tend to track inflation, but lots of things impact real estate prices, like interest-rates (for mortgages). Real Estate Investment Trusts (REITs) have been around for a long time and can be a good way to invest in real estate (better diversification and good liquidity). I shared a REIT book review in late 2024, and this book is worth the read for those who want to learn more.

There are lots of different REITs, and a few big ETFs. I track iShares U.S Real Estate ETF (IYR), but it is only $3.6 billion. A very large fund is Vanguard Real Estate ETF (VNQ), and it is 10 times as large. Here are those two over time:

A weak economy can really weigh on real estate, and these two funds were hit hard in the last recession (2008-2009) and when the pandemic hit. Over the past year, both are up almost 7%.

Treasury Inflation-Protected Securities (TIPS)

I sure like the name! Inflation-protected sounds good, right? I will discuss this here briefly, as I really like the idea right now. Before I go on, though, there is a big concern that the inflation index used by TIPS, CPI, is not good. I don't agree, but I see why some may be concerned.

I wrote a piece recently on Seeking Alpha that covered the TIPS saying that the iShares TIPS Bond ETF (TIP) was a good investment. It is about the same price now. Of course, I started writing here about TIPS earlier. My first TIPS article was written before the elections, and I followed up in November with another, which I think was better. I said that TIPS were primed to do better on 11/11. I have written several articles on TIPS.

Before I discuss the recent performance, let me say that the charitable fund that I run for my wife and me has 34% in a short-dated TIPS fund, VTSPX (and cash of 46%). I keep my eyes on the PIMCO 15+ Year US TIPS Index ETF (LTPZ), which my wife currently owns in her IRA along with the VTSPX-equivalent Vanguard Short-Term Inflation-Protected Security Index (VTIP).

There are lots of funds, and few seem to care! Here is how three iShares ETFs devoted to TIPS have done since the election, along with GLD and a money-market fund:

LTPZ has lagged cash, and the rest are slightly ahead. All are behind gold! Looking at the 10-year chart shows how much LTPZ has been left behind:

Again, as I have said before, the rise in long-term Treasuries is likely playing a big role. Perhaps, too, there are some safety questions about U.S. Treasury securities, which were downgraded recently.

Here are the current TIPS yields:

If inflation picks up, these securities should all do well. I think that LTPZ offers the most potential, but I am watching it closely right now.

Conclusion

Many people are concerned about inflation, but I am not sure it is headed our way. The USA does face a very big problem that could lead to inflation, but it may lead to a very weak economy. What is the problem? Our national debt level and the continuing budget deficits at the federal level. If we were not a leading country, most investors would fear inflation as the fix for this. Inflating the currency to repay the debts is not necessarily the way this will play out, and the USA has never done this.

For those looking to fight inflation with their investments, I suggest TIPS and cash and not gold.