Commodity ETFs That Can Protect You From Inflation

The problem with inflation that most people fail to realize is that it decreases purchasing power over time.  The same dollar that could purchase a gallon of milk or a gallon of gasoline when I was in college will be lucky to purchase a third of what it could.  That means that two-thirds of the purchasing power of that dollar is gone.  I can guarantee that your salary hasn’t tripled in those 20 years either.  That means your standard of living is declining.  You just don’t realize it because you have been moving up the ladder from an entry level position and have 2 earners in your household.  But purchasing power is declining.

In order to protect yourself from a decline in purchasing power, you need to own real assets whose value will increase in lock step with the decline in the value of paper currency.  Historically, such assets have been real estate, gold and silver, and commodities such as oil, natural gas, agricultural products and other natural resources.  Now it is easy to gain exposure to these various investments through the use of commodity exchange traded funds (ETFs).  The benefit of ETFs is that they can be easily bought and sold using an online brokerage account.  Many ETFs can be sold short and have options that can be traded as part of an investment strategy.

A few of the commodity ETFs that should be considered for investment are listed below:

GLD is the popular gold ETF.  Its price has been increasing along with the price of gold recently.  Actual physical gold is purchased by the ETF and held in a vault.  As demonstrated in this article, gold stocks may not actually do a good job of tracking the gold price.

SLV is the silver ETF.  Silver has a tendency to follow the gold price when investors are concerned about inflation.  The physical silver market is smaller, however, and so the price tends to be a lot more volatile.  In my opinion, you have to be pretty nimble if you want to trade in and out of silver.

USO is a popular oil exchange traded fund.  You need to be careful when investing in USO since the fund uses futures to gain exposure to the oil price.  There is a well known tracking error that may cause the fund to lag the true oil price.  DBO may actually be a better ETF at tracking the price of oil.

UNG is the natural gas ETF.  Another important source of energy in the United States, natural gas may serve as an important transition from fossil fuels to alternative energy sources.  Right now, there is ample supply of natural gas which has been evident in the price.  Should supplies begin to tighten again, there would be a great possibility of profit in natural gas.  One of the big concerns with futures backed ETFs is their size something that UNG has been dealing with since last fall.

There are other commodity ETFs that you could consider such as DBA or DBC as well.  No matter how you choose to protect your purchasing power, it should definitely be considered when devising a long term investment plan especially when nearing retirement.  Personally, I do not currently hold any of the ETFs that I mentioned.  I did hold USO last fall but did not like the tracking error.  I currently gain inflation protection from the physical silver and gold bullion that I hold, investments in Goldcorp, Yamana, and Silver Wheaton stock as well as some real estate investments.