The Producer Price Index rose by 1.7 percent in October, the largest monthly increase since 1990. It remains to be seen whether this signals a trend that will spiral. But investors who follow our approach can rest assured. Our parent, the American Institute for Economic Research (AIER), has long warned of the inherent decline of fiat currencies. We have designed our recommendations accordingly, to include built-in defenses against the ravages of declining purchasing power.

Contrary to the approach of many other money managers, among our fixed-income holdings we only include short-term bonds, which have a fixed payout, so long-term bondholders are locked into payments that will suffer diminished purchasing power during periods of monetary inflating. We seek to capture the returns generated by the “short end” of the yield curve.

We include common stocks as a necessary hedge against monetary inflating. Stocks were once considered appropriate only for speculators, but in a world of fiat currencies, nearly all investors have embraced equities, despite their inherent risks, as a means of protecting the real value of their holdings. We have sought to provide stability by recommending that investors take well-diversified positions in those equity asset classes whose returns are not highly correlated.

While all fiat currencies lose purchasing power over time, the dollar’s strength relative to other currencies is inherently unpredictable. It would be unwise for investors to speculate based on anyone’s forecast of foreign exchange rates. However, foreign equities, like U.S. equities, have positive expected returns over time. By maintaining a fixed proportion of their portfolio in those markets, U.S. investors will prosper during periods when the dollar is in decline, as it is currently.

Finally, we include real estate and gold for most portfolios. Commercial real estate, held through real estate investment trusts (REITs), has provided strong real returns over time, and its returns are not strongly correlated with those of either bonds or common stocks. If gold is viewed as a form of money, it has retained its purchasing power far better than any other currency over the very long term. In recent decades gold has not proven to be a particularly effective hedge against inflating, and has been extremely volatile, but it is a very unique asset. It provides a pattern of returns that is negatively correlated with those of most of our asset classes, and as such it can serve to reduce a portfolio’s volatility without negatively affecting its total return.

Also in This Issue:

Giving that Keeps on Giving
Harmony Gold Mining Co. LTD. Offer for Gold Fields LTD.
The High-Yield Dow Investment Strategy
Recent Market Statistics
The Dow-Jones Industrials Ranked by Yield