Finance hedge has been much more inconsistent than its historical record would suggest. Precious metals can also be highly volatile, which makes them less than ideal for conservative investors. And, of course, a gold bar doesn’t generate any income for you during the time that you hold it. However, if you’re concerned about persistent high inflation over the next several years, buying physical gold via an ETF that holds bullion might be something worth investigating. For seasoned investors willing to take on more risk, the stock of well-established, conservatively managed precious metals miners could be another option. Inflation-indexed bonds In times of high inflation, regular run-ofthe-mill bonds tend to take it on the chin. And that’s because inflation can significantly erode the interest which a bond pays after accounting for inflation (typically called a bond’s “real return”). The longer the bond’s term, the more that erosion can impact investors. A simplified example will clarify the danger. Imagine that you purchase a five-year government bond that pays, say, 5% interest a year. At the time you purchased it, inflation wasn’t a big concern, at just 1% a year. This means that in the first year, you earn a real return of 4%. In the second year, however, inflation spikes to 5%. Suddenly, your bond isn’t earning anything at all: yes, you still collect your 5% interest payments, but the purchasing power of those payments is being eroded by the same amount. And, if inflation creeps even more, you could actually be losing money in purchasing-power terms. Not a very attractive prospect. Inflation-indexed bonds offer a potential solution to this problem, with interest payments (and usually their principal, too) adjusted to keep pace with the rising cost of living. That provides fixed-income investors with a degree of much-welcomed certainty when inflation erodes the purchasing power of other fixed-income investments. Inflation-indexed bonds are usually offered by governments, and can vary in name and features according to the issuing country. In Canada, Real Return Bonds are offered by the Canadian government; such bonds adjust both their principal and their interest payments semi-annually with the national inflation rate. For U.S. investors, the interest payments on Treasury Inflation-Protected Securities (TIPS for short) are reset every month, offering even more protection. If you’re an investor with a significant portion of your portfolio in bonds, it might be a good idea to investigate these options. CSANews | SPRING 2023 | 29
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