Gold as an inflation hedge - really?

[meamakim]

I understand the concept of holding 25% gold to deal with inflation. However from my research online it seems gold actually does not move with real inflation (but spikes with fears of hyperinflation).

At the risk of PP heresy, to actually guard against inflation wouldn't it make more sense to invest in bonafide inflation hedges such as commodities, or bank loan funds? Or perhaps a mixture of, say, gold and the others?

Thanks much for any insights or comments.

[Tortoise]

Hi, meamakim. This question regarding the inflation-protection efficacy of gold has been discussed at length on this forum. I recommend reading the following two threads:

"Is gold actually an inflation hedge? Does it need to be?"
http://gyroscopicinvesting.com/forum/ht ... ic.php?t=5

"Positive Real Interest Rates"
http://gyroscopicinvesting.com/forum/ht ... ic.php?t=3

Regarding your question about potential inflation hedges other than gold: The main drawback is that you typically invest in those other inflation hedges in the form of some paper contract or product. Most people usually don't take delivery of actual barrels of oil or truckloads of timber, for example. With gold, by contrast, it's simple for most people to buy the real physical product--just go to a coin shop and buy some gold bullion coins. With physical gold held in your possession, you have zero counterparty risk; with paper products such as commodities futures or funds, you have various layers of counterparty risk.

To the extent that the 25% gold piece of the PP is intended to be a form of "broken promise insurance," counterparty risk in that part of the PP should be avoided if at all possible. But setting up a VP that holds some commodities and other inflation hedges is certainly an option for a PP investor.

[meamakim]

Tortoise - Thanks much, I checked out the links you mention and they are very informative. Seems like some people really believe in gold, and others are willing to switch it up and time things in order to go for yield.

I guess my next question is: if one does not intend to hold physical gold, is "paper" gold still the best thing to guard against inflation?

I suppose by definition if the portfolio doesn't have 25% gold, it wouldn't be a real PP, but I am okay with a modified version.

Thanks again

[Pointedstick]

"Guarding against inflation" with a single asset turns out to be tougher than it seems. Historically, short-term bonds have kept up with inflation... until a time like this when the Fed pushes down real yields. Do you want to earn a small real return? Short-term TIPS may do okay... but they're untested and also not doing well right now. Stock dividends are about matching inflation right now, but of course the principal can fluctuate greatly. Gold guards very well against high inflation, but has had long losing periods when inflation was low or moderate and stocks were very attractive.

I guess the point is that it turns out to be a lot harder to guard against the kind of low sustained inflation we have right now than high or dramatic inflation, which gold does very well with. At a time when rates are super low and inflation is low but positive, there simply aren't a lot of great options.

This is where the PP shines, in my opinion: it's a real return portfolio in all conditions. By combining these different kinds of assets, you wind up always beating inflation by at least a little. It confounds performance chasers because it's always losing to the hot asset du jour (right now it's stocks), but that's missing the point. The ideal PP investor is someone who's trying to avoid losing to inflation--which the PP excels at--not someone who wants high returns and is willing to risk negative real returns--sometimes very large ones, or for years at a time.

[Tortoise]

I guess my next question is: if one does not intend to hold physical gold, is "paper" gold still the best thing to guard against inflation?

Craig has a very informative Gold FAQ on his blog that discusses the pros and cons of various ways of investing in gold (physical, ETFs, Perth Mint, etc.).

The new Permanent Portfolio book by Craig and MT also discusses physical vs. paper gold issues in detail and is a great source of information.

Holding physical gold bullion is the safest option, but most PP investors seem to hold at least some of their gold allocation in the form of ETFs such as IAU and GLD. Sometimes it's just not possible to buy physical gold (e.g., 401(k) accounts), and even if it is, some PP investors choose gold ETFs out of convenience. You'll need to decide what level of counterparty risk you're comfortable with.

[melveyr]

The point is not what gold does verus inflation.

The real question is does gold, bonds, bills, and stocks combined into one portfolio give you smooth real returns. Looking at assets in isolation never makes sense. For something as abstract as gold it makes even less sense.  I only care about what the assets do together.

Here is the correct way to view things... look at a stock bond portfolios returns in real terms historically. Observe the times when it has underperformed its average. That is usually the time that gold is shooting the lights out.

If you want something that tracks inflation, buy an I-bond. If you want something to round out a stock, bond, and bill portfolio, then I would consider gold or CCF.

[moda0306]

The point is not what gold does verus inflation.

The real question is does gold, bonds, bills, and stocks combined into one portfolio give you smooth real returns. Looking at assets in isolation never makes sense. For something as abstract as gold it makes even less sense.  I only care about what the assets do together.

Here is the correct way to view things... look at a stock bond portfolios returns in real terms historically. Observe the times when it has underperformed its average. That is usually the time that gold is shooting the lights out.

If you want something that tracks inflation, buy an I-bond. If you want something to round outs out a stock, bond, and bill portfolio, then I would consider gold or CCF.

That.