With the recent downtrend in the market and inflationary pressure coming in from all angles, an investor has to be extremely cautious. Taking unnecessary risks will only lead to ugly losses and highly frustrating situations.

Golden Eggs
There is an age-old axiom: when inflation is on the rise, buy gold! This, of course, isn't the answer, you never want to put all your eggs in one basket - but there is truth behind it. Precious metals are commodities and when inflation is on the rise, prices of goods and services increase - gold, silver and copper are all goods and are affected directly by inflation.

With the Federal Reserve cutting rates aggressively and selling billions of dollars in T-bills every week, inflation is, without a doubt, on the rise. As an investor, you need to take the necessary precautions and invest accordingly. (To learn more, see What You Should Know About Inflation.)

The Answer: USAGX
It's understandable that mutual funds aren't for everyone - most come with moderate load fees and can be illiquid at times, but the USAA Precious Metals and Minerals fund (USAGX) looks pretty reasonable, especially during times like these. (For reading on the pros and cons of mutual funds, check out Mutual Fund Basics Tutorial and Advantages Of Mutual Funds.)

This fund does not invest directly into commodities, but instead picks stocks that are based solely in the precious metal market. The fund is cut up at about 95% stocks and 5% cash. Some of the top holdings are as follows:

Company % of Assets YTD Return
GoldCorp (NYSE:GG) 7.70 27.46%
Yamana Gold (NYSE:AUY) 6.77 39.03%
Agnico Eagle Mines (NYSE:AEM) 5.96 25.94%
Compania Minas Buena (NYSE:BVN) 5.19 34.33%
Barrick Gold (NYSE:ABX) 4.60 23.54%

All of the companies listed above have excellent returns as you can see and are some of the best performing in their industry.

The fund itself is priced quite fairly compared to its industry competition. USAGX has an overall P/E ratio of 26.22, where the industry average is about 28.65. The fund also has an attractive price-to-cash-flow ratio of 18.41 compared to the industry's 21.05. (For further reading, see Analyze Investments Quickly With Ratios.)

The Bottom Line
As inflation continues to rise, commodities will become more and more attractive. For investors with a smaller portfolio, it can be extremely expensive, stressful and downright difficult to trade individual commodity assets and contracts. With the USAGX, you don't have to worry about it; the mutual fund manager will take care of everything - you receive the proper exposure to the commodities market with the necessary diversification.

With this funds stellar performance over the last five years and the current price ratios pointing toward a slight under valuation, I think the USAGX is a real bang for your buck.

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