Gold as an Inflation Hedge

Whether we like it or not, gold is considered as an inflation hedge – a very reliable measurement of protection against the risk of purchasing power. Although, this precious metal may not be an excellent option for that purpose. Some investors fail to consider the volatility of gold, as well as the opportunity cost of owning one, while some fail to anticipate its storage needs and other logistical difficulties of owning this metal. For these reasons, some still view United States Treasury bills as a superior safety net alternative to this precious metal. In this article, we will take a closer look at the advantage of owning gold.

Gold Fever

As of the moment, it has fared a lot better compared to palladium, platinum, silver, and other precious metals. After hitting more or less $2,000 per ounce in 2011, it has bottomed out at around $1,200 an ounce for the past years. Just last year, it rises to $1,300 per ounce before settling to $1,700 an ounce as of today.

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Its rise this year is partially due to this metal’s formidable defense against the weakening value of fiat money or paper currency. But in light of the trajectory, a lot of investors believe that its future performance will still experience ups and downs, mostly ups because of what is happening in today’s world (the pandemic and political tension around the globe).

The case for treasuries

The most significant advantage of buying treasury bonds is that it locks in certain returns when it comes to investments. For instance, investors who purchased a $10,000 Treasury Bills in 1982 with a 30-year maturity, will get $40,000 after it matures with a 10.45% fixed coupon rate.

Of course, the day of double-digit percent coupon is long gone. For example, in 2014, the United States Treasury Department auctioned some 30-year bonds at a 3% coupon. But these types of bonds can still contain critical elements to any risk-taking portfolios.

But still, the United States government does offer TIPS or Treasury Inflation-Protected Securities, an effective and simple way to help eliminate the risk of inflation while providing a real rate of returns guaranteed by the United States government. As world inflation rises, Treasury Inflation-Protected Securities adjust in price to help maintain the actual value of the treasury bonds.

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The Exchange-Traded Fund option

Depending on the investor’s income level, Treasury investments are usually more favorable when it comes to tax obligations. But gold investors can level capital gain taxes’ playing field by investing in gold ETFs or exchange-traded funds, which are taxed like the typical bond and stock securities.

Within the exchange-traded fund framework, there are three ways in which people who want to invest can participate. The first way is by mining exchange-traded funds, benchmark against companies in the mining industry, appealing to people who are planning to invest and are not interested in the actual commodity ownerships.

Because these types of funds hold a combination of cash and contracts, they can generate enough interest income to offset the expenses. And lastly, there are pure-play Exchange-Traded Funds, which try to reflect the performance of the precious metal bullion by directly investing in trust bonds.

Bullion bars are bought and stored in bank vaults and insured by the bank. While this type of ETFs can track the bullions more closely, they can be taxed more than other methods. That is why investors need to know everything there is to know about gold as a hedge since investing in this precious metal is pretty complicated.

The Bottom Line

Knowing and understanding when to sell or bow out your gold investment can be a hard call. As a safety net against inflation geopolitical risk, this precious metal has ascended to greater highs over the past years, because of liberal central bank policies, like the United States’ Federal Reserve’s quantitative easing programs. From here, this precious metal could fall or rally further. No modern methods can predict which way it will go from here on out.

Savvy investors can take a closer look at gold in their portfolios and construct a better way to increase their investment and methods that suit their time horizon and temperament. Investing in this metal is risky, but if you know how to play the game, it can be very easy to increase your investment and pretty rewarding.

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