Should I Buy Gold Now To Hedge Against Future Inflation?

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Due to the current market conditions, many investors are wondering if investments in gold should be added to their portfolios to hedge against future inflation risks. In the video below (direct link), author Larry Swedroe discusses why he thinks gold is not an appropriate hedge against inflation, as well as some alternative investments.

The debate about gold will probably continue on for eternity, but I tend to lean towards his analysis because gold is too volatile for my tastes. I do like the idea of keeping some physical gold bullion as a hedge against economic collapse, but not as ETFs taking up a huge chunk of my portfolio. I would rather have something that would fit into traditional asset allocations plans, providing both stability and a good (but not perfect) hedge against inflation. So let’s explore the recommended alternatives:

In tax-advantaged accounts like IRAs, Swedroe instead recommends Treasury Inflation-Protected Securities (TIPS) which adjust with the Consumer Price Index (CPI). For this, I have bought shares of the Vanguard Inflation-Protected Securities Fund (VIPSX). I could buy individual funds directly from the government at no cost, but for now I like the simplicity. I even increased my allocation recently.

In taxable accounts, he recommends highly-rated municipal bonds with a relatively short average maturity of 3-5 years. For this, I am looking to buy shares of the Vanguard Limited-Term Tax-Exempt Fund (VMLTX). It is currently about 83% AA/AAA rated municipal bonds, and keeps a maturity of between 2 and 6 years (currently 2.8). The yield is currently a tax-exempt 2.12%, and it has a low expense ratio of 0.20%. If inflation does rise, the yield should rise to keep up.

I’m actually surprised he didn’t bring up commodities funds here as well, which I’ve seen him recommend as insurance against unexpected severe inflation.

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Comments

  1. I really enjoyed this video. I’m not super-informed when it comes to investment issues, but I can understand and follow the suggestions in the video easily.

  2. Instead of gold, I actually just upgradeds houses to hedge against inflation. I personally think that over the next 5 years or so, we will see a gradual, but steady increase in both interest rates and inflation. My hunch is that at the end of 5 years, inflation will be higher than my mortgage interest rate, so I’m effectively going to not be paying any interest on the mortgage.

    With the significant amount of spending and borrowing in the federal government, I just don’t foresee a situation where we don’t have higher interest and inflation rates. Plus, with home prices lower now, it’s a pretty good time to buy anyways.

  3. Interesting article. I do not own any gold, and I agree that it has been a poor inflation hedge in the past. In certain extreme “fat tail” event however I could see gold increasing, which is very unlikely.
    I would say that the best inflation hedge over the longer run is investing in stocks.

  4. I am not sure, I agree with this. With the dollar printing going on as a part of the bail out plan, the dollar is bound to go weak. If you really want to hedge against this then the play should be short the $ or long an asset that ppl run to when the dollar weakens (gold and maybe even oil).

    The problem now is looming deflation in which case TIPS will be bad, the feds will pile on more $$ into the market to counter this deflation (once the econ stabilizes) leading to the anticipated inflation and a chance for gold to run.

    disclaimer: long gold via DGP etf

  5. this video is interesting.
    Thank You

  6. OK…..so can someone quickly sum up why the TIPS should be purchased in an IRA or a tax-advantaged account? I am about to purchase some, but want to purchase more than my IRA account limit will allow.

  7. Prices of bond funds will drop like a rock when their yields rise!

  8. A few problems with these arguments:

    1. In the long term, gold is likely to return to it’s historical use as money. Every fiat currency devised has collapsed, and our own currency (the dollar) is very likely doomed once the intellectual switch is flipped and people realize that it is intrinsically worthless. So, while the past 30 years are perhaps disappointing from an investment perspective, it is relatively pointless to try to determine gold’s future based upon its past relation to the dollar. The real question that determines whether you should invest in gold or not is: will the dollar survive?

    2. While buying TIPS is a more accurate way to keep up with inflation, it is dangerous because you’re dependent upon the government’s calculation of CPI, which has been called into question over the years as being unrealistically low. What good will it be when TIPS are paying 20% when food prices are quadrupling ever year. If that happens, you better believe gold will be a far safer store of value.

    3. From another perspective, why would I want to support the morally dubious monetary policies of our government, especially when you think about the way we are likely enslaving future generations of Americans in an effort to “fix” the problems we are having today. If I’m angry at FDR and his generation for creating the Ponzi scheme of Social Security when the time to pay the piper is fast approaching, what will my children think when the last bubble pops and the US government goes bankrupt?

    So, while conventional wisdom might dictate the safer bet in TIPS (or the stock market in the long term), conventional wisdom will only last so long as faith in the dollar does. At the rate our government is going, I think I’ll bet on gold.

  9. An interesting way of ‘playing’ gold is to buy GLD which tracks the price of gold. The advantage being you can buy it and sell Out of The Money Calls against it and earn a little while you hold it.
    The short run prices might be bearish because the IMF will be selling a large holding.

  10. It pays to be flexible,don’t buy and hold for years. Commodities are good hedges against inflation, as are stocks. Look at whats working ever two months. Use ETF’s and low cost Vanguard funds.

  11. As a hedge against economic collapse, I have a total disdain for gold.

    Food, gas, water, building materials, bathroom tissue, etc, are better.

    Things that people can use is always better than some shiny trinket.

    Of course, I don’t believe in total economic collapse anyway. Even the Great Depression where there was 25% unemployment there were still 75% of the people with jobs.

  12. If you’re worried about a total meltdown, you’re better off owning a fertile plot of land for growing your own food … and the necessary weapons and ammo to defend it.

  13. great post benrj. i couldn’t have said it better.

    can anybody name a currency that has been around longer than gold?

    how bout zimbabwe? any inflation there?

    gld is also great for an ira.

    this video is the worst i’ve seen on this blog.

  14. Mike,

    I hope you have a warehouse to keep all those things.

    And btw, during the great depression our currency was backed by gold.

  15. Prashant says:

    Inflation? Forget about it. We’re deep in deflation territory here. Your definition of inflation is very unclear. If it is merely an increase in prices, then it isn’t complete. In fact, price increases are merely a consequence of inflation, not inflation itself.

    If you consider inflation to be the overall supply of money and credit (as credit acts like money today), we are seeing a massive contraction in the supply of money and credit. Well, OK, so the govt. is creating new money, but it is dwarfed by the ongoing contraction of credit. Anyone tried applying for new credit lines recently? Cards? Loans? Have you seen how banks are racing to raise capital to cover themselves? Who here expects wages to rise? Nope. Not a chance in the near future.

    Price inflation, an increase in prices overall, will return in some years, but for now we are firmly in deflation territory. I can guarantee we will never see price inflation as our house prices continue to decline.

    Simple case in point – Japan from 1989 until the late 90’s. Printed like crazy, but the destruction in credit overwhelmed any chance of inflation, and prices tended lower and lower, along with wages, and overall wealth. Take a look at where they are today. How much inflation did they see??

  16. Freddie Mertz says:

    Waren’s Bufet — You can’t be worried about a dollar collapse AND deflation. Hard to have both of those at the same time, given our reliance on imports.

  17. Instead of gold bullion, buy gold bullets. That way you have your gold and ammo, too!

  18. I have a small amount of gold and silver coins available as an inflation and currency hedge. I haven’t bought gold ETF or mutual funds. I don’t think the end of the world is coming so haven’t loaded up on Tp, guns, ammo, food, or bought an island in the Carribean. I have bought over the years purchsed a good number of I-Bonds, some now paying over 8%! I am looking into TIPS now in lieu of the I-bonds since they are going to zero percent basically on May 1.

  19. Gold has been traditionally hailed as a hedge against inflation and the recent rally in it might just proove that aswell. But in the long run its an asset which does not give encouraging returns and hence should be looked at with caution. also buying physical gold is much better than ETFs as you dont really know which company might go belly up next in these difficult situtaion and you would not want to be the one holding their ETFs. Physical gold is best if you have to buy gold. Else look at other options.

  20. based, among other things, on a intro on this website to the “Perfect Portfolio”, I’ve found and opened a gold holding account at Everbank. it seems to me to be one of the easiest ways to hold actual gold available.

    http://www.everbank.com/001Metals.aspx

  21. Nick Field says:

    This article is right on, you can see the real impact of expansionary monetary policy on the value of our currency in the fall in the relative value of the dollar since the US left the gold standard. See the current gold dollar price and real inflation rate at :

    http://www.brettonwoodsdollar.com

    Cheerio,

    N

  22. Thanks! The part about Japan make a lot of sense. I’m still reluctant
    to compare the United States to Japan though. Japan has a negative
    population growth rate and monitors their borders. Certain sectors of
    American Society are having babies like Obama is spending money.
    I am still thinking about buying and burying gold, and buying sterling flatware off ebay.

  23. I don’t own gold but I did some checking and Fidelity has a gold fund that has averaged a little over 20% each year for the past 11 years. That’s pretty strong…..

  24. Gold is a GREAT hedge against inflation people!!! Study history, 1 ounce of gold could buy you a fancy suit in 1918 the same 1 ounce can buy you a fancy suite today! Try to explain that…..

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