Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
AI Tech Stocks State Going into the CRASH and Capitalising on the Metaverse - 25th Jan 22
Stock Market Relief Rally, Maybe? - 25th Jan 22
Why Gold’s Latest Rally Is Nothing to Get Excited About - 25th Jan 22
Gold Slides and Rebounds in 2022 - 25th Jan 22
Gold; a stellar picture - 25th Jan 22
CATHY WOOD ARK GARBAGE ARK Funds Heading for 90% STOCK CRASH! - 22nd Jan 22
Gold Is the Belle of the Ball. Will Its Dance Turn Bearish? - 22nd Jan 22
Best Neighborhoods to Buy Real Estate in San Diego - 22nd Jan 22
Stock Market January PANIC AI Tech Stocks Buying Opp - Trend Forecast 2022 - 21st Jan 21
How to Get Rich in the MetaVerse - 20th Jan 21
Should you Buy Payment Disruptor Stocks in 2022? - 20th Jan 21
2022 the Year of Smart devices, Electric Vehicles, and AI Startups - 20th Jan 21
Oil Markets More Animated by Geopolitics, Supply, and Demand - 20th Jan 21
WARNING - AI STOCK MARKET CRASH / BEAR SWITCH TRIGGERED! - 19th Jan 22
Fake It Till You Make It: Will Silver’s Motto Work on Gold? - 19th Jan 22
Crude Oil Smashing Stocks - 19th Jan 22
US Stagflation: The Global Risk of 2022 - 19th Jan 22
Stock Market Trend Forecast Early 2022 - Tech Growth Value Stocks Rotation - 18th Jan 22
Stock Market Sentiment Speaks: Are We Setting Up For A 'Mini-Crash'? - 18th Jan 22
Mobile Sports Betting is on a rise: Here’s why - 18th Jan 22
Exponential AI Stocks Mega-trend - 17th Jan 22
THE NEXT BITCOIN - 17th Jan 22
Gold Price Predictions for 2022 - 17th Jan 22
How Do Debt Relief Services Work To Reduce The Amount You Owe? - 17th Jan 22
RIVIAN IPO Illustrates We are in the Mother of all Stock Market Bubbles - 16th Jan 22
All Market Eyes on Copper - 16th Jan 22
The US Dollar Had a Slip-Up, but Gold Turned a Blind Eye to It - 16th Jan 22
A Stock Market Top for the Ages - 16th Jan 22
FREETRADE - Stock Investing Platform, the Good, Bad and Ugly Review, Free Shares, Cancelled Orders - 15th Jan 22
WD 14tb My Book External Drive Unboxing, Testing and Benchmark Performance Amazon Buy Review - 15th Jan 22
Toyland Ferris Wheel Birthday Fun at Gulliver's Rother Valley UK Theme Park 2022 - 15th Jan 22
What You Should Know About a TailoredPay High Risk Merchant Account - 15th Jan 22
Best Metaverse Tech Stocks Investing for 2022 and Beyond - 14th Jan 22
Gold Price Lagging Inflation - 14th Jan 22
Get Your Startup Idea Up And Running With These 7 Tips - 14th Jan 22
What Happens When Your Flight Gets Cancelled in the UK? - 14th Jan 22

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Why Purchasing Power is More Important than Investment Profits

Economics / Fiat Currency Nov 04, 2009 - 05:48 PM GMT

By: Dr_Jeff_Lewis

Economics

Best Financial Markets Analysis ArticleGrowing your money is not the most important element of wealth. In fact, growth should come secondary to the preservation of wealth and purchasing power. Too often do investors get distracted with nominal changes in their personal wealth only to find that the thousands of dollars they have collected is worth considerably less than it was when the initial investment was made.


Purchasing Power 101

Purchasing power is a calculation of how much you could buy with X amount of money. Although prices seem stagnant in the short term, and are even depreciating for some products, general increases in consumer prices are only a natural response to inflation. 

Purchasing power should be at the forefront of a proper investment plan. Does it really matter if your investments are on track to be worth $1 million in 20 years if a loaf of bread will cost $20 and a gallon of milk $50?

The Failures of Cash Investments

Many people falsely believe that by storing cash in an interest bearing savings account or certificate of deposit, they are hedging themselves against inflation. However, this is rarely the case. Because bid interest rates (those you receive for lending, or depositing, in a bank) often lag true inflation, the damage to purchasing power is done long before true inflation in prices arrives. 

CPI is Not an Inflation Measurement

Many banks and institutions sell “inflation-protected” debt instruments that are tied to the inflation rate. Usually, these investments pay a certain percentage per year with a bonus added to rival the inflation rate, thus guaranteeing that investors always earn more than the rate of inflation. 

This couldn't be more intellectually dishonest, as the Consumer Price Index fails to take into consideration the change of the money supply, but rather the change of prices of consumer goods. The CPI is calculated by finding the prices for a “basket” of consumer goods and charting the average change in price over a period of time.  Much of the “basket” is centered on consumer staples like groceries, gasoline, etc., as they make up the most basic elements of modern life.

Where the CPI Fails

One of the failures of the CPI index is that it only reflects the changes in the sticker price – and not the changes in the amount of the consumer goods. If you visited a grocery store in the past ten years, you have likely noticed that the sticker price of many goods has not changed, but the weight of the product has. For example, bags of sugar (one part of the CPI) were almost universally sold at $1 per 5 lb bag until five years ago. Today, you'd be hard-pressed to find a single 5-lb bag of sugar, as most companies have begun to sell 4 lb bags, but at the same price of $1 per bag.

Although the price did not change, the quantity did by 20%. However, this change went unnoticed by the CPI calculation.

How to Track True Inflation

The only way to track the true inflation rate, and thus protect your spending power, is to invest in hard assets (commodities, physical metals, etc.) that rise in value as the value of the dollar drops. 

Gold and silver especially track the change in the money supply with accuracy, as the amount of gold and silver at the surface of the earth proportional to the number of people remains consistent. In contrast, inflation increases the amount of dollars in circulation. When you have more paper money while the supply of precious metals stays consistent, this only leads to an increase in the value of the precious metals themselves. 

The only way to preserve your spending power and your wealth is to meet or exceed the true rate of inflation, not the rate of inflation as calculated by complicated (and often corrupted) economic models.

By Dr. Jeff Lewis

Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

Copyright © 2009 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in