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Forget Gold -- Potash Corp. Is Your Inflation Hedge

NEW YORK (TheStreet) -- Are you looking for a conservative inflation hedge that's not gold? Then you may want to take a closer look at Potash Corp. of Saskatchewan (POT - Get Report).

It's got liquidity, a nice dividend and good technicals. Despite being a portfolio staple, Potash Corp. has acted as a leveraged inflation hedge in the past and could do so again in the near future.

I'll explain why, but first let's backtrack a bit. "Inflation" is generally recognized as an increase in consumer prices, but prices anywhere can rise and fall either because demand rises, supply falls, the total money supply changes or there's combination of all three.

To call an increase in demand or decrease in supply "inflation" is simply wrong. Inflation is an increase in the money supply rather than an increase in prices. Inflation is the cause. Price increases are the effect.

Let us call the effect "price inflation" and an increase in the money supply itself "inflation proper".

In order for price inflation to be unleashed, you need is a catalyst. If a match is lit and there's already lots of inflation proper in the system, that's when prices can really take off.

For example, the ongoing drought in Brazil has the effect of constricting coffee supply, but not so much that prices would double in four months. One can assume that demand has stayed more or less the same over the past four months, so the answer must be that the inflation proper already in the system found a place to go once a coffee supply crunch started. The new money was just looking for an excuse to land somewhere and it found coffee, amplifying the price rise. Following is a chart of the iPath Dow Jones-AIG Coffee Total Return Sub-Index (JO), and exchange-traded note designed to track coffee futures.

Exactly how much more money is now circulating since coffee bottomed in early December? In other words, how much inflation proper is in the system since coffee bottomed? About $291 billion, according to Federal Reserve statistics. 

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