Trading in an inflationary world

When you do a search related to inflation and trading you will encounter many articles related.

You will notice that the majority of them are quite similar. This is due the fact that they belong to generalist investing webs. Many of the articles written in those webs are by people who have not really traded in their lives or know little about it. They tend to talk more about PCI and such things.

They are not actually bad articles about inflation, but they are not done from a trader point of view.

For example, when we are told about PCI IPP, PCE, oil price, and so on, it is because they think that by knowing what the PCI will be, you will be a better trader because you will know “what to do”.

Depending on the decisions made about those indicators, there will be better opportunities to invest or to get funding.

This type of writing is directed mainly to the Forex crowd, which try to capitalize that data.

An article that tries to get closer to the true importance of that concept of trading is the one at, in which they talk about the “inflation trade”, in which they say something like this:

“Inflation trade is a concept broadly considered when investors believe there is risk or potential to gain from rising price inflation. In times of rising price inflation many investors will rotate their portfolios into assets generally more favourable in an inflationary environment. Treasury inflation protected securities (TIPS) are a top recommendation for investment portfolios when inflation is on the rise. Sophisticated investors and traders can also make targeted speculative trades using derivative instruments to orchestrate inflation trades that seek to capitalize on rising future prices”

Well, despite the fact that this article tells us that there makes sense to do “inflation trades” in inflationary environments, as in the 70s, it does imply that it is not good to do “inflation trades” in times of low interest rates, like the 90s.

From a classic point of view, typical inflationary trades would be those related to rising oil or gold prices like in the 70s, in which inflation and interest rates were very high.

Trading and the importance of inflation in the FIAT World

What really happens is that this World is extremely inflationary in nature, which means that we live in a constant “inflation trade”, which does not only happen in theoretically inflationary times.

In a world based on FIAT currencies we have a guaranteed inflation which will translate to a worsening of those currencies, whether it is the dollar, the euro, the yen or the Venezuelan bolivar.

In this sense we can compare any currency, from the powerful yen to the Argentinean peso. The only difference is that both currencies depreciate at different speeds.

But, what am I talking here about?

Evidently I am not talking about TIPS.


The FIAT world is intrinsically inflationary and gives us the chance to trade countless inflationary trades.

We have stocks currencies, commodities, bonds, stocks and lately criptocurrencies, although the latter could be included in the former.

Among those there is one worth mentioning: the stock market.

The rest of assets are also good to do trading in an inflationary world.

Among those, we could highlight gold, the asset that shows us the consequences of living in an inflationary world.

We just need to see the long-term chart of gold to notice that we are in a world in which the forces of monetary depreciation are the ones that rule.

This can be easily seen when we compare that one with any other official currency of the world in the last 70 years.

gold inflation trade
Images corutesy of tradingeconomics

Gold price is, in fact, the best indicator of the fact that we live in an inflationary world.

Other assets that show us the rate of depreciation in the last one hundred years are the commodities.

Last but not least, the bond market has a long-term trend. This is a 200 hundred years bull market which is comparable to the stock market. However, this market suffered a huge convulsion in the last crisis of the 70s, in which some sort of anomaly surfaced. In that case the interest rates spiked massively, making that the long-term trend in bond values was shattered temporarily. Although after that the quasi-eternal bull market got on its tracks.

The real interesting case of an “inflationary world” has do to with the stock markets, the true catalyst of all inflationary forces, and a great ally of the trader.

Stock market for an inflation trader

inflation trade stock markets

The secret of doing inflationary trading consists of riding the long-term trend that rules the current world: the trend towards “quantity”.

In that trend towards quantity, we have that the stock markets quote at ever higher prices decade after decade, and even in the cases like Japan, if we measure all the dividends, we would have a recovered market after the 1989 debacle.

Being an inflationary trader in stocks means something so simple as when we have to trade the long-side of the market, that in which the masses trade altogether.

Trading the short-side we are going to find just problems.


Because in the short-side we get the majority of unexpected occurrences and the falls are much more violent and shorter in time than the rises.

That is to say, a stock market takes years to rise a 50%, however, it can fall 33% (the equivalent to 50% rise) in a matter of months or just a year.

As we wee the bear markets differ quite a lot from bull markets.

What does it tell us?

That tells us that the bull markets last longer and are bigger.

What should you do as a trader in a market that gives you more probability of one outcome?

Betting for that outcome, obviously.

What happens here with day trading?

This is one of the main problems of this way of trading. It tries to go against “nature”, against the main trend, because by following some indicators in the 5 minutes chart you will get bull and bear trades with the same probability.

The problem is that the “inflationary effect” is barely noticeable in the “day trading” terrain.

That is why the best results always come by following trends in the medium and long-term, whether investing or doing long trades.


Some good examples of these inflationary trades we find in the criptocurrency world, or even in some currencies like the Mexican, South African or Turkish ones.

However, it is possible that we are reaching a moment of ever increasing imbalances in which there could be some sort of anomalies.

However, meanwhile, and as long as the market does not tell us otherwise, the best thing to do is to trade with the inflationary force at our favour. That is to say trading the long side of the market in stocks, the best asset for this kind of thinking.

Regards and good trading.

Original article: Trading en un mundo inflacionario