If that is not enough to get prices moving again, the US central bank – and others –could take a more drastic approach and devalue the currency against gold.
Either way, inflation is bound to emerge. Insiders at the Fed, Rickards says, have suggested the bank would like to see inflation at about 3.5 per cent, but from there it could surge to between 7 per cent and 9 per cent.
As Rickards, who addressed an Australian Institute of Superannuation Trustees conference on Thursday, noted on his blog this week: “Once inflation perceptions shift, they are extremely difficult to reset.”
Australia is unlikely to escape the clutches of inflation.
If and when the US dollar falls in value and the Australian government declines to dramatically increase the supply of sovereign bonds to meet high demand for Australian dollars from offshore investors, the Reserve Bank of Australia may be tempted to reduce rates again here in an attempt to lower the local currency. That could ultimately lead to higher prices.
Cash may not protect investors against inflation, but it will reduce volatility in a portfolio, and it gives investors options to invest quickly in other asset classes when they look attractive.
Look no further than the portfolio of the world’s best known and most admired investor, Warren Buffet. He has some $US55 billion ($60 billion) in cash. Rickard reckons cash should be as much as 25 per cent of investors’ portfolios.
Buffet may not hold gold because he is frustrated by its lack of yield, but Rickards likes the asset class. It performs well in inflationary environments and can also be useful during periods of deflation – as it was during the Great Depression.
Lastly, the author and economist likes hard assets, again because they will perform well in inflationary periods. On his “buy” list are shares of transport and agriculture companies and consumer non-durables manufacturers. Out of favour are technology, consumer durables
SLR Price at posting:
41.5¢ Sentiment: Hold Disclosure: Not Held
