Seek Commodities to Hedge Against Inflation

By Investopedia Staff | June 28, 2012 AAA

The actions that our government is taking today will have consequences. The U.S. Treasury is printing money with wild abandon, and while they are doing what they must to prevent an economic catastrophe, that doesn't mean it won't come at a cost. It's a near certainty that future inflation looms.


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Time Will Tell
To be sure, the world economy is still doing a lot of deleveraging and the U.S. consumer is going to be frugal for some time. After watching their home and other assets continue to decline in recent years, U.S. consumers aren't going to be as quick to spend as they used to. Nonetheless, the massive printing of the dollar will likely lead the currency downward which creates inflation. In inflationary environments the best stocks to own are those with pricing power, like commodity based stocks.

SEE: All About Inflation

Don't Let Cash Burn You
While sitting in cash can feel nice, there's nothing worse than being duped by inflation. It's cash's worst enemy because it crushes the value of your cash without you realizing it. Instead, consider quality commodity-based businesses.

Commodity Choices
Teck Resources (NYSE:TCK) is a good diversified play. This Canadian giant produces a wide array of commodities including zinc, coal, copper and gold. A lot of times, one commodity is selling near a high (like gold today) while other might not, and Teck can use this to its advantage in volatile times. It trades at a P/E of 7.6.

Mosaic (NYSE:MOS) is a solid play on the fertilizer turnaround. No commodity, in my opinion, will be needed more on this planet than fertilizer. The world's supply of arable land is shrinking against an increasing population. The result is more crops per acre and that can be done only through the use of fertilizer. At a P/E of 10.2 you're buying a blue chip quality business for a fraction of a blue chip price.

Investors who want to spread their assets directly into commodities can take a look at the PowerShares DB Agriculture ETF (ARCA:DBA) which actually holds agriculture commodities like wheat, sugar, and soybeans. Or for commodities, the PowerShares DB Commodity Index (ARCA:DBC) holds oil, gold and corn futures.

The Bottom Line

The best time to buy any quality asset is when the price is temporarily depressed. They can be a nice asset to own if inflation rears its ugly head.

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