By John Wasik
CHICAGO, July 16 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
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
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),
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
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