Hard Assets as a Hedge Against Inflation
May 25, 2022
- What is a Hard Asset?
- Which Assets Are a Strong Hedge Against Inflation?
- Why Real Estate is Especially Resilient in Times of Inflation
We’ve all felt the sting recently filling our tanks up at the pump and filling our carts at the grocery store. Our dollars aren’t going as far as they once did even a few months ago. Inflation has hit us all hard.
A Forbes survey revealed consumer confidence is wavering as nearly 25% of consumers report spending more than usual and 37% are saving less than usual.
In the wake of the pandemic the disruptions to supply chains, shuttered businesses, job losses, and global conflict have all contributed to the highest inflation rate since 1982. We saw a huge spike in March with the US inflation rate reaching 8.5% before dipping to 8.3% at the end of April.
To put that into perspective, the Federal Reserve aims for a 2% inflation rate to maintain a burgeoning economy. Generally, a healthy inflation rate for the US falls between 1% and 5%. While there’s a bit of wiggle room, if inflation extends beyond 5% wages can’t keep up with the cost of living.
At the current 8.3% inflation rate, our purchasing power has been greatly diminished.
Even though current inflation has many of us concerned, there are a few safeguards against inflation. Hard assets can act as a hedge against inflation, helping you navigate through an uncertain economic landscape.
What is a Hard Asset?
A hard asset is a tangible asset that holds intrinsic value. Hard assets typically include resources naturally scarce and limited in supply that also fulfill a fundamental, basic human need. Because the nature of hard assets are illiquid, physical resources, they cannot be immediately traded and serve as long-term investments that keep their prices and value relatively stable.
What also makes hard assets attractive investments is their high correlation with inflation. Meaning, when inflation rates rise so do the value of hard assets, generally, making them an exceptional hedge against inflation.
Which Assets Are a Strong Hedge Against Inflation?
Distinct from soft assets like stocks and bonds whose value can rise and fall dramatically based simply on the evening news report, hard assets hold inherent value. For example, commodities like crops and raw materials are a type of hard asset.
Adam Selita, CEO of the Debt Relief Company said in an interview,
"Commodities tend to have outsized returns during times of high inflation."
Other examples include natural resources and energy commodities such as oil and gas. Paintings and collectibles fall under the hard asset category as well as an original Van Gogh painting will only ever continue to go up in value.
Precious metals like gold and silver are also regarded as a time-honored hedge against inflation as they hold intrinsic value unlike the dollar and various currencies.
Real estate, however, holds a unique position among its hard asset counterparts. Not only does real estate preserve its value during times of inflation, but real estate also offers the opportunity to the owner to earn income in the process.
Why Real Estate is Especially Resilient in Times of Inflation
There will always be a demand for real estate in some form regardless of the economic environment, making real estate a quintessential investment for those looking to protect against inflation.
The Land vs. The Structure
Real estate can be looked at as two separate commodities: the land and the structure itself.
Naturally, viable land is limited as well as the raw materials the buildings are made of, lending real estate to be a valuable hard asset. When inflation rates rise, so do property values. The prices and value of the raw materials used in construction also rise, making the building and structures more valuable as well.
The weighted value of all types of commercial real estate including retail, office, multifamily, and self-storage has increased by 180% over the past 20 years.
In times of economic growth, real estate sees a positive impact as more businesses open up and expand, calling for an increased demand in real estate. Even in periods of economic recessions, many asset classes can still thrive, an example being self-storage real estate which sees a demand as businesses and consumers downsize, and many driveable hospitality destinations. Vacations to these destinations are still kept in the budgets of many families even in the midst of economic hardship.
Self-storage and Multifamily
Self-storage and multifamily rental properties are particularly well set up for inflation. Both typically have month-to-month leases allowing landlords to quickly adapt to market changes and raise rents respectively to keep in line with rising property values and inflation. This allows self-storage and multifamily investors the opportunity to earn higher rental income over time when other soft assets are struggling.
So while we may see our grocery and gas bills jump to uncomfortably high numbers, investing in hard assets like real estate, precious metals, and energy resources, will help you hedge against inflation and ride out the wave of economic uncertainty.