Inflation hedge

Inflation hedge: Which is better gold or Treasury bonds

Gold is widely regarded as an inflation hedge, a reliable measure of protection against the risk of losing purchasing power, whether right or wrong. However, precious metals may not the best option for that purpose. Some gold investors overlook volatility as well as opportunity cost, while others overlook storage requirements and other logistical complexities associated with gold ownership. For these and other reasons, some people consider US Treasury bills to a better safe haven alternative to gold. Both asset classes have their own set of advantages and disadvantages; here’s a look at them.

Inflation hedge: Gold Fever vs. Slow and Steady

Inflation hedge

Gold, like any other investment, fluctuates in price. Long periods of time may require for investors to realize profits, and research shows that the majority of investors enter when gold is near a peak, implying that the upside is limited and the downside is more likely. Slow but steady Treasuries, on the other hand, provide less excitement but more consistent income. The longer gold is held over Treasuries, the more painful these opportunity costs can become due to the sacrificed compound interest.

Having said that, gold has recently outperformed silver, platinum, and palladium, as well as most other precious metals. The price of gold increased by 28% in 2020. The price of gold has remained relatively stable through 2021 and into 2022. Gold’s price has always fluctuated, as has the price of any other investment. However, given this trajectory, many people believe gold’s future performance is uncertain and prefer to invest in Treasuries.

An arguably minor but still present concern: some gold investors must also deal with the chore of safely storing their investment, either at home in a vault or in a bank safe deposit box. However, bullion coins held for a year or more are classified as “collectibles,” sicomparable to art, rare stamps, or antique furniture Whether in the form of an American Eagle gold coin, a Canadian Gold Maple Leaf coin, or a South African Krugerrand, the sale of the precious metal results in a long-term federal capital gains tax rate of approximately 28%, nearly double the 15% capital gains tax rate for typical stocks.

Inflation hedge: The Case for Treasury Bonds

Inflation hedge

The main advantage of purchasing Treasury bonds rather than gold is that the former guarantees certain returns on investment. Investors who bought $10,000 in 30-year Treasury Bills in 1982 would have made $40,000 when the notes matured with a fixed 10.45% coupon rate. Of course, double-digit percent coupons may be a thing of the past. Nonetheless, such bonds can an important part of any risk-averse portfolio.

Nonetheless, the government provides Treasury inflation-protected securities (TIPS), a simple and effective way to eliminate inflation risk while providing a real rate of return guarante by the United States government. TIPS prices adjust to maintain their real value as inflation rises.

One disadvantage is that TIPS typically pay lower interest rates than other government or corporate securities, making them unsuitable for income investors. Their main advantage is inflation protection; however, if inflation is low or nonexistent, their utility decreases. TIPS also pose the risk of triggering taxable events when semi-annual coupon interest is paid.

Inflation hedge: The ETF Option

Treasury investments are typically more tax-efficient, depending on your income level. Gold investors, on the other hand, can level the capital gains tax playing field by investing in gold exchange-traded funds (ETFs), such as the Market Vectors Gold Miners ETF (GDX), which are taxed in the same way as traditional stock and bond securities. Within the ETF framework, investors can participate in three ways. ETFs for gold mining, benchmarking against mining companies and appealing to investors who aren’t interested in actual commodity ownership

Because these funds hold a mix of contracts and cash (usually in Treasury bills), they can generate interest income to offset expenses. AdvisorShares Gartman Gold/British Pound ETF is one example (GGBP). Finally, pure-play ETFs seek to replicate the performance of gold bullion by investing directly in gold trusts. Bullion bars purchase, insure, and store in bank vaults. While pure play ETFs may follow the bullion more closely, they are taxed more heavily than other versions. PowerShares DB Gold Short ETN is one example.

In conclusion

Knowing when to give up on gold can difficult. Gold has risen to new highs as a hedge against inflation as a result of liberal central bank policies such as the Federal Reserve’s recent quantitative easing programs (and geopolitical risk). Gold could rally or fall further from here; no one knows which way it will go. Treasuries, on the other hand, remove speculation (as well as some excitement) from the equation. Savvy investors should examine gold versus Treasuries in their portfolios and devise an allocation mix that best suits their temperament and time horizon.


Is purchasing gold an effective inflation hedge?

According to some studies, gold can be an effective inflation hedge, but only over a very long time horizon of more than a century. Gold’s inflation-adjusted price fluctuates dramatically over shorter time periods, according to researchers. Since 1972, the gold price to CPI ratio has averaged 3.6

What is the best way to protect against high inflation?

“By far the best inflation hedge for the average investor,” she says. TIPS bonds pay fixed-rate interest twice a year and are available in 5-, 10-, and 30-year maturities. At maturity, investors are paid the greater of the adjusted principal or the original principal.

Do Treasury bonds outperform inflation?

They specifically design to protect your money from inflation, and the Treasury Department recently announced that the I Bonds issued through the end of October will earn a six-month annualized rate of 9.62%. These bonds are safe places to park your money, preventing it from losing value due to inflation.

Why is gold no longer a good inflation hedge?

It simply means that gold does not correlate with inflation and thus does not protect against it. Rather, like many other investments that are not inherently linked to inflation, the price of gold fluctuates based on investor sentiment.

Where do you keep your inflationary funds?

Moving through asset classes, treasury inflation-protected securities, which are bonds designed to protect investors’ purchasing power by adjusting to rising prices, are a safe option for investors. TIPS are government-backed securities that offset inflation by adjusting the value of their principal.

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