Gold as a Hedge Against Bonds During Low Interest Rates

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Perhaps it is because I somehow ended up buying $5,000 in gold coins a couple weeks ago, but I’ve been doing some reading about gold again. The stock market is at higher and higher valuations, while the Fed promises that interest rates will stay low for a long time. The real yield on TIPS remains negative, meaning that it is highly unlikely that any high-quality investment-grade bonds will beat inflation over the next decade. Is there really no alternative?

This Compound Advisors article does a great job exploring why gold is not an ideal hedge against inflation. The comparison chart below of performance since 1975 summarizes things in one picture. Over the 50 years since the US came off the gold standard, gold has only barely kept up with inflation while stocks and REITs… well, just look:

Here is the price of gold over the last decade (FRED).

Okay, so maybe I’m not interested in holding a huge chunk of gold as a long-term asset. But what about a little bit during this strange period of negative real yields? Movement Capital points out in the chart below that gold prices are “tethered” to real interest rates. Gold prices seem to go up when bonds stop keeping up with inflation.

If you own bonds, it is quite possible that your return this year has been negative. I peeked and the Vanguard Total Bond ETF (BND) is down 4% YTD (as of 3/19/21). Gold seems to perform best when bonds perform their worst, as highlighted below:

Therefore, if bonds are supposed to keep your portfolio safe, but right now they are in the vulnerable position of paying out less interest than inflation, gold might be a good complement. Even if gold just matches inflation, you would still come out ahead. Of course, gold often feels so volatile that it is hard to rely on the price for anything specific.

I’ve said before that I simply don’t have the proper faith in gold to own it long-term, and I’m still in that place. I suppose my primary observation is that low interest rates have made nearly everything go up in price (stocks, bonds, real estate, Bitcoin), but gold seems to be mostly ignored.

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  1. What did you buy? Any recommendations?

    • I haven’t done anything, but I did consider buying a little bit of a gold ETF in my IRA to avoid tax paperwork. GraniteShares (BAR) recently started a low-cost ETF that is cheaper than many of the heavily traded ones.

      However, I’m going to admit that my primary position on gold is more “doomsday prepper”. I like the idea of owning 1% in physical gold in your possession. You could think of it as part of your portfolio, but I wouldn’t even care about the price very much. Many people have had ancestors that had to flee their home country due to political unrest or war, and well, gold is something that will retain some value and you easily transport it. If you’re going to use gold as an insurance policy of sorts, keeping it in physical form lets you also use it as insurance against other unlikely disasters.

  2. Georgia brewer says

    I’ve held a “token” position in a gold ETF (IAU) for many years now for the same kind of reasons you talk about. The return has not been overly impressive long term, but there have been periods when it shines (pun intended) in comparison to other asset classes.

    I wonder if there are any “experts” out there still pushing the old permanent portfolio idea — one-fourth of your assets each in stocks/bonds/cash/gold.

    • There are definitely still plenty of proponents of the Permanent Portfolio out there. Gold has been “meh”, but long-term bonds have had a great run over the last 30 years. The question is how many proponents will stay if/when rates rise.

  3. Keep in mind the spread between a gold trust like GLD that’s tied to the price of gold and the actual price of the physical metal. I’ve invested in many asset classes over the years and the premium for physical delivery of a 1 oz gold coin has risen from $40 a few years ago to approx $200/coin today.

  4. I’ve found that Aurum (see link below) are an intriguing way of using gold to hedge, but in a way that’s much easier to get into a lower price point. Many local business in the Western US accept them as tender (usually state-specific).

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