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I'm looking for an investment that will appreciate against inflation in the US Dollar. I want to be leveraged 10:1 or more. For the sake of argument, let's say I have only $10,000 to invest, which rules out most real estate investments. I have high risk tolerance and a 10 year outlook.

  • I think this is off topic per the FAQ: "Requests for specific buy/sell advice;" – MrChrister Sep 8 '12 at 16:27
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$10k isn't really enough to make enough money to offset the extremely high risks in investing in options in this area. Taking risks is great, but a sure losing proposition isn't a risk -- it's a gamble. You're likely to get wiped out with leveraged options, since you don't have enough money to hedge your bets. Timing is critical... look at the swings in valuation in the stock market between the Bear Sterns and Lehman collapses in 2009. If you were highly leveraged in QQQQ that you bought in June 2009, you would have $0 in November.

With $10k, I'd diversify into a mixture of foreign cash (maybe ETFs like FXF, FXC, FXY), emerging markets equities and commodities. Your goal should be to preserve investment value until buying opportunities for depressed assets come around.

Higher interest rates that come with inflation will be devastating to the US economy, so if I'm betting on high inflation, I want to wait for a 2009-like buying opportunity. Then you buy depressed non-cyclical equities with easy to predict cash flows like utilities (ConEd), food manufacturers (General Mills), consumer non-durables (P&G) and alcohol/tobacco. If they look solvent, buying commodity ETFs like the new Copper ETFs or interests in physical commodities like copper, timber, oil or other raw materials with intrinsic value are good too.

I personally don't like gold for this purpose because it doesn't have alot of industrial utility. Silver is a little better, but copper and oil are things with high intrinsic value that are always needed.

As far as leverage goes, proceed with caution. What happens when you get high inflation? High cost of capital.

  • What do you think about options on those new inflation-insured treasury bonds? Are those optionable? – John Shedletsky Nov 19 '10 at 18:58
  • Individual bonds don't generally have options readily available, but exchange-traded bond funds (e.g. NYSE:TIP) may be. The general problem with inflation-indexed bonds is that when there's inflation, sooner or later there are generally interest rate increases too. This means that the face value on your existing bonds will fall (to match the interest rate you could get buying a new bond). What this means in practice is apparently relatively untested. – fennec Nov 19 '10 at 19:57
  • Bonds are subject to various risks: credit risk (will the borrower pay?), rate risk (will bonds fall in value due to yield?) and liquidity risk (is there a market for the bond?). Bond funds primarily address credit and liquidity risk as they diversify more than an individual could. You'll still get periodic income from the bond payments, but your investment is still subject to swings in valuation due to rate risk. That's why I'm suggested focusing on capital preservation if you're worried about runaway inflation -- you want to buy bonds when rates are high. – duffbeer703 Nov 19 '10 at 22:06
  • @John Shedletsky: As fennec said, you can buy options on Bond ETFs like TIP. But keep in mind that you've now introduced another huge risk factor to the equation: time. Like I mentioned before, had you correctly predicted that the subprime industry was going to fail when Bear Sterns collapsed, you could still have lost everything if you didn't time it right! If you're really committed to options, I think fennec had the right idea with his other comment: focus on commodity ETFs and buy a rabbit's foot. – duffbeer703 Nov 19 '10 at 22:12
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Look into commodities futures & options. Unfortunately, they are not trivial instruments.

  • That's a mechanism not an investment. I am comfortable trading options. What do I option? Also, most options have a 2 year expiry. – John Shedletsky Nov 18 '10 at 0:08
  • You could look for options on commodity ETFs like IAU, GLD, SLVR, PPLT, PALL. – fennec Nov 18 '10 at 22:02
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I assume you're looking for advice, not an actual guaranteed-to-appreciate answer, yes?

If you believe Treasury bonds will increase as fast as inflation, that may be the way to go.

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    Treasury bonds are crap. You are kidding? The government printing money is the scenario I want to hedge against. I don't think you know what leverage is. – John Shedletsky Nov 18 '10 at 20:48
  • Then buy gold futures or gold spot on the Forex exchange? – barrycarter Nov 18 '10 at 20:52
  • -1 Fixed income investments are kind of like the opposite of an inflation hedge. – fennec Nov 18 '10 at 22:00
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    The bond market adjusts the market price of bonds to reflect current rates. Today you buy a 5 year treasury bond yielding 1.17% for 100 (or par value). If rates went up to 7% on the same type of bond, the value of your 5 year bond would drop substantially. Given the fact that rates are incredibly low, and the US government has largely shifted to short-term debt, treasuries are not a good investment if your vision of the future is similar to the original poster's. – duffbeer703 Nov 19 '10 at 0:45

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