Column: Gold still not the best inflation fighter

CHICAGO Tue Jul 16, 2013 10:45am EDT

Gold ingots of 999 purity, used for the production of gold medals for the 2014 Winter Olympic Games in Sochi, are seen at the Adamas jewellery factory in Moscow, June 28, 2013. REUTERS/Sergei Karpukhin

Gold ingots of 999 purity, used for the production of gold medals for the 2014 Winter Olympic Games in Sochi, are seen at the Adamas jewellery factory in Moscow, June 28, 2013.

Credit: Reuters/Sergei Karpukhin

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CHICAGO (Reuters) - As U.S. interest rates have risen, owning gold has been a loser's game for anyone is trying to hedge against inflation.

Gold isn't a smart inflation hedge, but many people have been using it that way because they think they have few alternatives.

A low-inflation rate has been punishing to gold investors for the past three months, and the Consumer Price Index has been running well under 2 percent this year. As evidence, the leading gold bullion vehicle, the SPDR Gold Trust ETF, has lost nearly a quarter of its value over the past year as investors continue to sell out of their positions. It was down 23 percent year to date through July 12.

Stocks of gold-mining companies, which can get bruised even more than spot metal prices, have fared worse. The Market Vectors Gold Miners ETF, which holds leading mining companies such as Barrick Gold Corp and Newmont Mining Corp lost nearly half of its value year to date, off 47 percent.

To be fair, gold prices have rebounded in recent weeks. Gold reached a near three-week high after Fed Chairman Ben Bernanke hinted that a highly accommodative policy was needed for the foreseeable future. But, at around $1,285 per ounce on Monday, gold is no where near it's high of $1,889 in 2011.

AN ALTERNATIVE TO GOLD

Will the Federal Reserve's cheap-money machine slowdown ratchet up interest rates even more? A distinction needs to be made: The tapering of its "quantitative easing" programs may or may not lead to inflation. Nevertheless, rising rates - and a resulting stronger dollar - hurt gold bullion, which doesn't pay dividends or interest.

One of the biggest downers for gold owners - in addition to plummeting prices - has been the popped-balloon idea that significant inflation was threatening the U.S. economy.

Since the 2008 meltdown, the United States has been in deleveraging mode, which is disinflationary. Wages have been stagnant and consumer prices tame. Gold rarely makes sense in a low-inflation, slow-growth economy.

Perhaps investors woke up to that fact en masse over the past three months when it became apparent that the Fed said it was more confident that the U.S. economy was firmly on a sustainable path. By June 28, gold had posted its biggest quarterly loss on record - falling 23 percent to $1,180.70 an ounce. It is currently trading at $1,282.10.

Outside of money-market funds and floating-rate bank loan funds, which I've covered in an earlier column (see link.reuters.com/cam69t), a useful and less skittish way to hedge inflation is through Treasury inflation-protected securities (TIPS) funds.

While TIPS yields are also lackluster in a low-inflation environment, they can better protect against longer-term inflation expectations. Because they are indexed to a well-known index that tracks consumer prices, they are much less volatile and boost yield when inflation rises.

The iShares Barclays TIPS Bond fund, which I hold in my 401(k) account, holds inflation-indexed bonds. With a 4.7-percent annualized return over the past three years, it's returned more than twice what the SPDR Gold Trust has offered, which has gained only about 2 percent over the same period.

Year to date, though, the iShares fund has been disappointing, showing a 7 percent loss, which compares favorably to the 23-percent loss posted by the SPDR gold fund.

Why would I recommend a fund that's lost money? Because I think that although short-term inflation fears have been wrong, prices will gradually accelerate across the board as the economy heats up in coming years.

Now's the time to buy TIPS, not when inflation is in full force. If the economy continues on its upward trajectory, prices usually follow. The latest U.S. jobs report showed employment growing faster than expected - nearly 200,000 new jobs were created in June.

So far, though, inflation hasn't been a problem. The latest Consumer Price Index report pegged the annual inflation rate at 1.4 percent through May. Last year the gauge was under 2 percent. You have to go back to 2007 to see the highest annual cost-of-living change since the 1990s (4 percent). Note: That was just after the housing market peaked, but before the credit bubble burst.

Despite the recent rebound in gold prices - the metal posted gains over four days last week - the double whammy of the dollar's rebound and U.S. interest rate increases will make gold even more undesirable. Goldman Sachs cuts its forecast for 2013, predicting gold will end this year around $1,300 an ounce - down 9 percent from a previous forecast.

Goldman stated that gold prices will continue to drop "given our U.S. economists' forecast for improving economic activity and a less accommodative monetary policy stance."

Although there's still a lively debate on whether inflation will manifest itself to any large degree in the near future, gold won't have much luster if rates climb and dollar gains continue.

(The author is a Reuters columnist and the opinions expressed are his own. For more from John Wasik see link.reuters.com/syk97s)

(Follow us @ReutersMoney or here Editing by Beth Pinsker, Lauren Young and L Gevirtz)

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Comments (2)
JohnManfred wrote:
I have rarely read an article more filled with rubbish than this one. Gold is NOT a “popped bubble”. It is an asset that has been been subject to severe artificial manipulation downward by an entity with unlimited access to easily printable money, on behalf of a group of casino bankers who desperately wanted to escape short positions and go long. While the get-rich-quick speculators on COMEX are “down and out” now, with the lowest level of confidence in years, in the real world of physical gold, people are buying as much as they can get their hands on. Perhaps, most important, the casino bankers, who are privy to Fed, ECB, Bank of England and Bank of Japan policies, far in advance of actual announcements, via the Trojan horse appointees they have placed in positions of power, are buying all the gold and gold derivatives they can con foolish speculators to sell to them.

In practical terms, bank accounts pay no interest. Normal bonds also pay virtually no interest, unless you buy 30 year issues, which is a sure way to go broke, because interest rates are going to rise into the sky over the next 30 years, eventually reflecting sovereign insolvency. TIPS bonds are worse than worthless. They reflect a very deliberately calculated government formula that has been altered, over the years. The CPI no longer reflects the change in prices of a fixed basket of goods, but, rather, is contaminated with subjective issues like “product substitution” and “hedonic adjustment”. The government reports an inflation number which is considerably lower than the real level of inflation, and TIPS owners suffer from that. The actual inflation level, right now, calculated on the pre-1982 CPI formula (which predates the US government’s need to reduce social security cost of living adjustments) is about 8% and will be rising fast, as the velocity of money returns to a more normal level.

Over the long run, intense physical demand for gold, as well as intense paper demand from big banks who manipulate the gold market, and who want to continue switching from having been short to being more and more heavily long gold, will cause the price to rise far beyond the previous highs.

Jul 17, 2013 1:25am EDT  --  Report as abuse
JohnManfred wrote:
One more thing… this author states, several times, that “Goldman says” this and “Goldman Sachs says” that. Their advice will only be correct if they happen to need a mass of speculators to bet their money in a direction that the bank wants the market to go. Right now, Goldman, as well as the other casino bankers, DO NOT want gold prices to go up quickly, because they are all buying. So, do NOT do what Goldman Sachs “says”. Do what they do. Right now, they are buying gold, and so should we.

Jul 17, 2013 1:32am EDT  --  Report as abuse
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