Inflation is dead, according to the latest CPI figures. But you may want to protect yourself from it, just in case. Many people now are asking why gold, the traditional hedge against inflation, now costs more than it ever has in the history of the U.S.?  In fact, this past week it briefly came close to surpassing $1,050 an ounce.

One possibility is that gold is reacting to investors’ increasing fear that inflation will rise.  Gold, after all, is a leading indicator of inflation, not a coincident indicator.  With U.S. government debt continuing to set record highs, low interest rates, and a huge boost to the monetary base in recent months, investors have good reason to be nervous.  Certainly, it may be enough to keep the the dollar locked in its current downtrend—which will eventually lead to higher prices for imported goods. At the same time, if the developing world continues its rapid growth, commodity prices will continue rising—creating a form of inflation that is very difficult for the government to control. 

Add in the possibility that the U.S. economy may actually start to recover, and the case for inflation becomes very strong. In this environment, the easiest way to protect yourself—and make excellent returns—is to invest in the strongest sectors.  Gold, developing economies, and commodities have outpaced the S&P in recent months, and look set to continue this action for some time.

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