Using Real Assets To Inflation Proof Your Wealth


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There appears to be a battle going on at the moment between inflationary and deflationary forces. We?re getting mixed messages from economists and policymakers – should we be worried about inflat

There appears to be a battle going on at the moment between inflationary and deflationary forces. We?re getting mixed messages from economists and policymakers – should we be worried about inflation or deflation? While there is still much short-term uncertainty, in the medium to long term the threat of inflation is very real. When it comes to protecting your wealth throughout retirement, today?s inflationary conditions are not that relevant ? what matters is what inflation will be over the next one, five, ten and twenty years. Have you taken steps to maintain your financial security in the face of inflation?

Inflation may be low at the moment, but most commentators believe that it is set to rise to high levels as a result of economic stimulus measures around the globe. There is an increased amount of money in circulation, and every extension of quantitative easing measures adds to the risk of an inflationary surge. Inflationary policies are technically and politically easy to implement but technically and politically very difficult to unwind.

Former US Federal Reserve Chairman, Alan Greenspan, has warned that inflation will be the ?greater future challenge? and that it will set in again by 2012 – or even earlier if markets anticipate a prolonged period of elevated money supply. According to Warren Buffett the economic rebound could kindle inflation worse than it did in the 1970s.

There is another, completely separate element that could contribute to higher inflation in the future ? the rise of Asia. US political commentator, Kevin Phillips, advises that: ?the rise of Asia – approaching 60% of the earth's population and on the cusp of a plurality of world wealth – is realigning global economics and political power. The history of such great realignments is inflationary.?

He warns that ?when future chroniclers describe the late 20th century and early 21st century global inflation now about to renew, the rise of Asia will be an even bigger causation than the massive money expansion set in motion over a quarter of a century.?

The consistent hallmarks of an inflationary environment are higher petrol prices, higher energy bills and higher food cost ? items we spend money on every day.

But there is a positive side ? it is possible to take advantage of the global trends like the rise of Asia and the world?s increasing consumption of commodities to inflation proof your wealth.

The emergence of the Chinese economy on the world stage is probably one of the biggest economic stories of our time. The financial crisis will pass into the history books but China will remain one of the world?s biggest consumers. According to International Monetary Fund estimates, China is the single country that contributes most to global economic growth. If China and India maintain their current growth rates, they will join the US as the world?s largest economies (as measured in purchasing power parity) by 2025.

Developing countries represent 75% of the world?s land mass and house more than 80% of the global population. Their population is expected to grow five times as fast as in developed countries. The world population is growing by around 750 million a year and by 2030 more than one billion people are forecast to join the ever increasing consumer middle class.

All this creates a huge increase in demand for food, clothes, housing, water, energy etc. For example, China, once a net exporter of grain, is now one of its largest importers.

Forecasts suggest that agricultural output will need to double by 2050 to meet total demand for food ? but will that be possible at a time of land and water shortages caused by the rising population? Drought, overuse of fertilisers and bad irrigation are also taking their toll. In some areas the demand for fresh water already exceeds supply. The growing middle class in Asia has resulted in a shift in diet from grain to protein ? and producing protein takes up much more land than grain. All this puts pressure on food prices.

Then there?s the ongoing massive infrastructure build in developing nations ? water supply, bridges, roads, energy, factories, houses etc – creating rising demand for commodities. As the global economy moves towards growth, commodity prices are likely to increase.

Commodities almost always increase in price in years when inflation rises. People need commodities to survive, regardless of how expensive they become. The supply situation for many commodities is tightening due to a variety of factors, which could make them more expensive ? bad news for consumers but good for investors. Commodities, along with other real assets like equities, property and fixed interest investments, provide an effective hedge against cost of living rises.

Population growth, infrastructure build, changes in food habits and supply, strained water resources, needed energy investment? all these are long-term trends that will take years to play out. This is therefore an ideal time to consider investment strategies which take advantage of these global themes and protect your wealth from inflation. Speak to an experienced financial adviser like Blevins Franks to establish what opportunities are available and whether they are suitable for your objectives and circumstances.

By Bill Blevins, Managing Director, Blevins Franks

12th August 2009

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