Hedging against inflation: from the metaverse to gold, the 7% portfolios

Hedging against 7% inflation: from the metaverse to gold via Berkshire

With inflation knocking on the door of 7%, money sitting idle in a current account becomes a guaranteed loss. Part of the retail investing community has responded, but not with a single answer: some buy inflation-linked bonds, some bet on the metaverse and some take refuge in physical gold. The discussion, open for almost five years, leads to an uncomfortable conclusion: there is no perfect hedge, only different ways of losing less.

The starting point is a classic strategy: bond funds linked to inflation, designed to preserve purchasing power rather than to make gains. From there, the theses diverge. One camp backs indexed equities —S&P 500 and MSCI World in fund or ETF form— with regular contributions, the well-known DCA strategy. Another prefers specific stocks: utilities, pharmaceuticals, defence and consumer staples. And a third, smaller but noisy group, plunges into speculative bets like the metaverse or cryptocurrencies.

What people buy to avoid losing purchasing power

The list of securities that come up in the conversation is a catalogue of Spain's middle-class investors. In dollars: General Mills, Intel, Kimberly-Clark, Lockheed-Martin, 3M, Merck, Southern Company, Duke Energy and Consolidated Edison. In euros: Allianz, RWE, Sanofi, Siemens and Smurfit Kappa. The logic is always the same: companies selling products or services consumers cannot stop paying for, from electricity to packaging paper.

Some add a sector nuance. Utility companies work, in the words of one participant, like "the closest thing to owning mafia shares": regulated revenues, inelastic demand and the ability to pass costs on to the bill. Banks, on the other hand, divide opinion. Some argue that rising rates will boost their profits; others point out they have been "bleeding" for years and the market still isn't buying it.

Water comes up as a thematic bet. An ETF domiciled in Ireland that invests in water management and sanitation companies shows, according to its defenders, an almost perfectly upward line for years. The thesis: sanitation fees are updated with inflation and demand is structural.

Gold, Bitcoin and the permanent portfolio

Against equities, a more defensive camp backs vaulted gold and Bitcoin as a hedge against "fiat" money. The approach does not seek returns: it seeks to fall less than everyone else when "the great purge" arrives and to have liquidity to buy opportunities. It is a resilience thesis, not a profit one.

Harry Browne's permanent portfolio and Ray Dalio's All Weather appear as theoretical frameworks for those who don't want to choose. Both are designed to work through growth, inflation, deflation and crisis, with average returns around 7% a year and historical maximum drawdowns of 12% with recovery within a year, according to the defenders of these portfolios. The problem, the sceptics point out, is that those figures come from a period of falling interest rates that is unlikely to repeat.

The metaverse and other bets that hedge nothing

Not everything being bought has anything to do with inflation. One participant admits buying shares in metaverse-linked companies as a speculative bet, accepting volatility and zero short-term returns. Microsoft's acquisition of Activision, with the consequent drop in Sony, is read as confirmation that the sector is on the move.

The problem is that these bets can go in exactly the opposite direction. A review of the returns of a selection of stocks recommended at the start of the year shows the damage: MoneyMe is down 88.92%, MetaMaterials 56.18%, ZIM 70.60% and Microsoft 27.70%. The average of an equal-weighted portfolio of those stocks would be -21.95%, below the indices, according to one forum user's calculation. The conclusion he draws: those selling courses promising to beat the market rarely do.

The classic that held up: Berkshire Hathaway

A year after the discussion began, one figure stands out: the only thing that has kept pace with inflation is Berkshire Hathaway stock, according to one participant. Anyone who invested in Warren Buffett's conglomerate in 1995 would have earned a return of 1,466%, with the share rising from 20 to 320 dollars and surviving the dot-com bubble and the 2008 crisis, according to the same calculation.

The irony is that Berkshire is not an inflation hedge in the strict sense. It is a cash-generating machine that buys businesses with pricing power. The lesson from almost five years of conversation is that simple strategies —index funds, regular contributions, patience— still beat the complicated ones. And that 7% inflation is not hedged with a single idea, but with a portfolio that holds up when the scenario changes.