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Commodities and Inflation: How to Trade Now

This post is part of a regular series written by ETF Trends editor Tom Lydon, special for CNBC.com.

The ever-increasing threat of inflation and the spike we’re already seeing in commodity prices is highlighting the countless hedging opportunities available with commodity-based exchange traded fund (ETF) investors.

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It’s time to start thinking about how you’re going to hedge rising prices, because chances are, we’re in the thick of it and it’s not going to resolve itself anytime soon, for these reasons:

-The dollar is generally at lows not seen since late last year, making it cheaper for countries outside the United States to purchase commodities, which are priced in U.S. dollars

-The Treasury may have to print even more money, further depreciating the value of the dollar

- Threat of an interest rate hike is small, as it might put a crimp in any U.S. economic recovery efforts

- Emerging markets such as China and India are showing positive GDP growth, which has led to greater commodities demand, particularly when it comes to oil

It's now easier to invest in commodities and hedge against inflation. Before ETFs came along investors had to deal with tricky and pricey futures or the cumbersome act of physically holding and even storing a commodity.

Right now, there’s huge access that wasn’t there just a few years ago, and there are billions now flowing into ETFs. Oil didn’t spike from $30 to $150 a barrel simply on rising demand or a drastic drop in supplies — speculation had a role. If you can’t beat ‘em, join ‘em. The speculators are a powerful force in the markets these days.

Keep in mind, however, that commodities can be very volatile. By having an exit strategy in place before you invest, you can protect yourself from any sudden trend reversals.

There are ETFs available to track specific commodities, such as oil, gold, silver and agriculture. But if you’re having trouble zeroing in on just one or two commodities to invest in, think about a total commodity ETF.

Here are two among the broad commodity ETFs out there:

iShares S&P GSCI Commodity-Indexed Trust

PowerShares DB Commodity Index Tracking

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More Key ETFs:

SPDR Gold Shares

United States Natural Gas

MSCI Emerging Markets

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Tom Lydon is the editor of ETF Trends and author of iMoney: Profitable ETF Strategies for Every Investor.

Disclaimer