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July 14, 2010


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Two things:
1) Just to be clear, those people who bought gold at the height of the market in 1980 are still underwater, thirty year's later (adjusting for inflation, naturally). Here's a good chart about it.
Right now, Gold is expensive. If you buy gold, and it drops back to its historical price levels through the late 80's 90's of around 500$ per ounce, you would loose 50% of your capital. Reading this article, you'll see that gold is an investment not unlike stocks, with large swings in value, and erratic returns. It may go up more, or it may go down (this article bets up) but either way, its nothing like the stable return of government bonds. Even if the government understates inflation by 1%, you still hold steady if you get a TIPS bond with a rate of 1%, and make money with a rate of more than 1%.

2) Of course there was no inflation this last year. Housing prices, the most expensive good most consumers buy went down by a significant percentage. Everything else would have had to be vastly more expensive to make up for the strong deflationary force of the housing decline. Since we're in a deflationary environment, the fact that TIPS can't give a negative return is another point in their favor.

There are definitely arguments in favor of owning gold, but in my opinion, this doesn't go deep enough.

1. Could you explain how Greece's crisis could happen here? I was under the impression that Greece's debt was denominated in euros. The U.S. can just print more money to pay it off. So wouldn't a better comparison be with California or another cash strapped city or state?

2. Are you trying to point out that the government's method of calculating inflation is flawed? Do you have another method of calculating it that we should be aware of? And are you saying that TIPS should give an inflation adjustment, even when there's no inflation?

3. If gold is an inflation hedge, why does its price vary so widely over time after taking inflation into account? Gold is at about $1,200 per ounce right now. In 1980, it was more than $2,000 per ounce in 2010 dollars. So its price hasn't kept up with inflation (as measured by the government, which you argue is underestimating it to begin with).

Anyway, that's about as tactful as I can be in saying that I think I disagree with you. Socratic method edition.

StLPastor is exactly right, and no one pays you dividends to own gold. In fact, you have to either pay someone to hold it for you or you have to buy an expensive safe for your house. If you are worried about the US government defaulting on treasuries your best investment options are canned goods, guns and arable land.

I wasn't interested in TIPS a few years ago. At the time it seemed like there were better places to be stashing money. Then... after the bubble burst and we had the great losses in the market, I decided that TIPS maybe weren't so bad after all. And now that I am within 5 years of retirement they seem even better. I really don't know much about gold investing. But I feel TIPS are as safe as our government. And I do think our government is safe. Maybe gold would be better if our government fails completely...but I doubt that will happen. TIPS will not make you a lot of money. But they are probably one of the safest places you can put your money today. For that reason, I like them. And... they will keep up with inflation.


A don't buy TIPS argument from a gold bug.

First, this argument has nothing to do with TIPS. If you think the "paper" is no good due to sovereign default that doesn't apply just to tips but to any government paper including all treasury bonds of any kind.

Second, the Obama White House doesn't just decide what inflation is (I think you have made this argument before MasterPo). The BLS (Bureau of Labor Statistics) calculates this number. Always has. Been doing it long before Obama and will be doing it long after. They don't just make up a number, they have a rigorous formula. You might think the formula is wrong but it's there for all to see and it cranks out a number regardless of what any administration wants the number to be. The white house is merely looking at the inputs to the CPI and telling you what that formula is likely to produce in the next few years.

Oil went to $150 per barrel in 2007. Now its $70. Corn went to $7 per bushel now its $3.50. Wheat went to $18 per bushel, now its about $7. Houses are down over 30% since then.

So the inputs to the cost to buy fuel, heat and cool my house, buy food, and buy shelter have all dropped dramatically in the last 3 years and are now stagnant and you think there is some kind of rampant inflation. Face it, the CPI is not perfect but there is not some rampant inflation that it is missing. There is no pricing power right now and there is little if any inflation. Easy money might bring us big inflation in the future but there is clearly no real inflation pressures right now (many are suggesting there is deflation) but you can just say "Phuleeze!" and I guess that is supposed to count as some kind of argument or evidence.

I don't have a strong opinion about the value of TIPS but the reasons given here to avoid them don't seem very well founded. One advantage of TIPS is you can buy a long term instrument that pays you a real return every year. If inflation rises (as measured by the BLS CPI formula) you will get paid more. If the inflation does not rise and there are not strong external pressures you will still get the real rate of return. With gold there is no rate of return at all. It's purely a speculative bet on the future value of gold which will be influenced primarily by three things: world supply of gold, world demand for gold as a hedge against inflation, world demand for gold for functional purposes (such as jewlery or other more practical purposes). That's it. If demand for gold were to drop not only would you not get a real return you would get a negative return. If demand for gold increases dramatically you would get a huge return. Gold is not really an investment. It's a speculation on future demand. In that context I don't think it's really a responsible thing to do to compare gold to TIPS.

The only rampant inflation I see is in the price of gold.

"it’s been leaked they plan to say there will be no inflation in 2010 and 2011"

That is pure fiction.

Wow, you guys beat me to the punch with some really good responses.

I agree gold is not without its merits, but this article is very flawed in making its case for it.

I know StLPastor has mentioned it, but I want to elaborate on his second point. The Fed greatly increased the money supply in 2009 for a good reason. In essence, they were desperately trying to combat against a potential runaway deflation, which has been devastating in our weakened economic state.

I know it's hard to believe, but inflation in and of itself isn't always a bad thing. It's the "runaway" part in runaway inflation or runaway deflation that you really want to watch out for.

I don't think I'll ever understand people who refer themselves in third person, or advocate gold as a panacea.

love the comments, and i totally agree that if you dont trust TIPS then you shouldnt be invested in anything the government sells thats on paper. Also, gold is not some haven, as mentioned above, it can go up and down, and since its at a recent record high, it wouldnt be a stretch to say that the trend for gold prices should be heading down. either way, the only way gold is a good INVESTMENT is if you think the US government will default on its debt or some other catastrophic economic failure occurs. otherwise gold is a bet just like stocks, you hope to see a rise in price, but at least with some stocks you can get dividends each year and still make some cash!
Preferred Financial Services

So are you advocating that we buy gold instead?

I agree that buying paper to protect against paper makes no sense, but I do not think gold is a much better option for the reasons other commenters have made clear.

I'll be staying away from both.

When you sell gold, isn't it also taxed as a collectible at a much higher rate than capital gains?

I get the urge to try to hedge against some catastrophic event, but I think people are better off diversifying currencies. Having all my investments in dollars makes me nervous.

Uh, I'm not impressed with MasterPo's conspiracy theory.

Anyone who thinks the US government is going down and defaulting on their debt, AND who also believes that if that happens they are somehow going to be protected by their "buying" and holding some kind of precious metals or cows or whatever, is IMO on a par with those who think lending cashto Nigerian princes is a good investments.


Dude, if the US gov goes down in flames, you'll have so many problems! Unless you control your own full-on militia you won't keep your gold hoard nor will you will able to trade it for anything useful like food without being robbed and probably also raped and killed too. Kind of like in Columbia or Somolia or Afghanistan, you know?

Plus, even if you hate Obama, he doesn't have the power to regulate inflation or the economy. If he did have that power, wouldn't he have made it so we'd all be rolling in money right now? The Nov elections would all go in the Dems, if the economy was doing great, you know....

The words are "losing" or "lose". Not "loosing" or "loose". Sorry, pet peeve of mine. And I saw it twice on the same page - so naturally it made me loose my mind.

Looks like Old Master Po got educated.

"...there will always be an eager market for gold".

1/96 $400/oz
10/99 $300/oz

If that's an "eager market" I'm not interested.

Petpeeve, I was going to make the same complaint. I see that typo all the time and it bugs me, too.

Deflation/inflation- there are many types of deflation/inflation and if one is making investment choices based on inflation or deflation, it’s important to know what type of inflation/deflation you are measuring.

Contrary to general opinion, deflation is not always bad and it can depend on one’s station in life. As a consumer, deflation is good. As a holder of assets that are deflating, it’s bad. As a holder of debt, deflation can be good (Inflation bad). As a debtor, deflation can be bad (Inflation is good). I would love for all of your homes to deflate in value by 50%+. Bad for you, good for me.

Deflation of asset prices is not really accounted for in the CPI calculation- for example: rents and rental equivalents is a solid method, by I fear it misses the true deflation in housing values. You can see an increase in the CPI as consumables increase in cost and still have asset deflation.

The fed increasing the monetary base does not mean there is 'inflation' of prices or that inflation will occur. You can have an increase in the momentary base while having deflation- the money multiplier can drop (velocity of money, M3) as credit tightens. If the momentary base increases and the velocity of money decrease by the same amount, you have zero net change and zero inflation of the currency.

Depending on what type of inflation or deflation you expect, you should make investments that fit your thesis. It’s really not as simple as the terms imply.

TIPS- I dont follow them that closely. I think there are far better hedges against CPI inflation- owning stocks, owning companies that pay a div and are consumer staples, etc. TIPS have a short history and they tend to underperform in a rising interest rate environment. So, if you are trying to hedge monetary inflation, TIPS might underperform. The reason not to own TIPS is because they might be a bad vehicle and have a tracking error.

Gold- Unless you own physical gold, you own paper. It’s a psychological asset class- very had to value. I own some physical gold- why not? No idea if its over or under valued.

US govt is very different from Greece. Yes, we can 'inflate' our way out of debt. Default- sure, but unlikely and not worth discussing. Comparing the US to any country right now is really a poor analogy.

Most everyone who has responded so far to this post should be familiar with my stance towards currency and wealth, so I won't reiterate it here. I would like to say two things, though, that seem to bear out amongst the responses:

1) Everyone seems dollar-centric. Aside from the obvious (dollars are transactional units and not stores of wealth), you should try and run those same numbers in different currencies, also adjusting for inflation in those currencies. It paints a slightly different picture.

2) There is a big difference between having serious debt issues and the US devolving into a post-apocalyptic wasteland ruled by underground mutant cannibals, something that people on both sides of this issue tend to gravitate towards. The problem with either defaulting or inflating our debts is the trade system we have in place. We import most everything, which means if other nations stop, or even slow, exporting to us, it'll mean real hardship here. Excessive debt and lack of confidence we'll repay it (either with less valuable dollars or through default) is a very real concern. We're being removed as the reserve currency. I doubt anyone alive on this board has any real recollection of what the US was like prior to Bretton Woods. OldLimey *might* have a conscious recollection of it, but even then, he'd have been rather young.

Having said that, I doubt the US will default either. It's much more likely we'll inflate those debts away. The big question on my mind is/has been how can I preserve my wealth as the US does the only thing it really can do and inflates? How much would that be, how fast and how would that affect trade relationships?

One last thing - it's always popular to pull from the parabolic top for gold in 1980 if you want to talk down gold; it's also a bit disingenuous. I could make the same case that stocks are the worst investment in the world to buy if I go from the 2000 NASDAQ or SP500 top and inflation-adjust for a decade as well (down about a third, btw). That's why FMF and others talk about buy and hold over the long term rather than try and market time. Paper bugs are just as bad as gold bugs.

Agree with most of what has been said in the comments. Just a cursory look at housing and fuel prices backs up the idea that there has been little if any inflation, and we're actually if anything in a deflationary period. Stating it's a matter of fact there has been inflation with no evidence whatsoever to back that up is very disappointing. I regularly read this blog, but this article was painful to read. Claiming the Obama administration is just making inflation numbers up is utterly ridiculous. Ignorance of how much inflation is going on is not a justification for assuming the government is lying about inflation. And yes, they can actually predict to some degree what they think is going to happen with inflation in the next few years. Are they always right? No, but the forecast is still useful for what's going on right now, and how that will impact inflation. I realize that blogs like this aren't professional pieces of journalism necessarily, but leave uneducated guesses, conspiracy theories, and bias out.

Wow! MasterPo knew he wouldn’t be winning too many friends with this article but that wasn’t the point.

MasterPo is glad it has spurred discussion (and hopefully personal thought) on the subject.

As much as MasterPo would like to respond individually to each comment, that isn’t practical. So the following is a collection of responses to various points already mentioned and some that are probably being thought about if not yet posted:

- MasterPo is NOT a “gold bug”. MasterPo has never been interested in commodity trading or investing. But physical gold (and to a lesser extent silver) is an asset everyone can and should own some of as a hedge against the unknown in general. Just one more piece of an overall financial plan and investment strategy.

- MasterPo isn’t going to argue financial analysis about the gains of gold vs. say the S&P 500 over 20-30 years. The returns are what they are. That wasn’t MasterPo’s point about buying gold over TIPS. It is the difference between a physical and historically proven asset (the gold mined by the Aztecs and Egyptians still has value today, can’t say the same for their currency!) vs. paper. It really is that simple.

- MasterPo isn’t necessarily predicting inflation or hyper inflation any immediate time soon (though it does seem inevitable give the current government policies). MasterPo’s investment in gold as opposed to TIPS is based much more on personal financial protection against political and social upheaval and the general unknown of the seemingly perilous times we live in. Nations and currencies come and go, but gold survives.

- Yes, the U.S. can go the way of Greece and the other PIIGS. Printing currency to pay borrowed debt or unfunded programs is a death spiral. Considering the [very real] possibility is not ‘conspiracy theory’. Saying “It can’t happen here” is the surest way to make it happen. Remember: The Titanic couldn’t sink either. MasterPo hopes to Heaven he’s wrong about that happening but is not too optimistic. There are many scenarios how such could play out, not all of them end in a ‘Mad Max’ disaster but none of them end with a rainbow sunset either. The can has been kicked down the road to the end. And in all cases physical gold will be more valuable than paper sovereign debt paper. Even the mighty Romans didn’t last forever. And the sun did eventually set on the British Empire. But the gold they owned still has value today.

- Not to digress from the point of this article but YES, MasterPo does totally believe the government’s calculations of inflation are grossly inaccurate. For one thing the gov very conveniently ignores the costs of food and energy. “Too volatile” they say. Well excuuuuuuuuuuse meeeeeeeeeeee! MasterPo (and you) have to pay for food and energy regardless of how “volatile” it is. Just because the gov chooses to ignore it doesn’t make it go away. Another thing is taxes. A new tax on this, a raised tax on that – it all adds up but isn’t included in the inflation equation. The Bush tax cuts will expire Jan 1 2011. It’s a safe bet a great many people reading this site will be affected. Your costs just went up. Inflation - whether the Federal gov chooses to acknowledge it or not. (these are just some examples; MasterPo doesn’t want to get into a full discussion at this time, that’s fodder for another article).

- You can’t use real estate and housing as indicators of overall inflation. Land transactions have their own set of market realities.

- The cost of physical gold ownership is a topic often brought up – and is a false argument. Coins and ingots are easily and cheaply kept in a safe deposit box. Even if you choose to get a decent safe for home it’s still cheap. You’ll probably use the safe or deposit box to store other valuables and important documents as well. MasterPo doesn’t like gold storage services.

- Physical gold is an unregistered, untraceable asset. One of the few we have left. Use your imagination as to the pros and cons.

- Being unregistered you don’t pay gains or tax on the sale (yet). If you take a gold coin to a jeweler and sell it you get cash in hand and that’s that.

- Blame Mr. Gates for the typos. Word didn’t pick them up.

- MasterPo is NOT advocating selling all you have, buying gold, and hiding in the basement with a shotgun! Sheesh! MasterPo still holds quite a few equity and bond positions and has no plans on selling them for the time being. But rigidity also has no place in financial affairs. Even Warren Buffets says not to fall in love with an investment.

- MasterPo acknowledge his conclusions may not ultimately turn out true in the long run of life. World events and human behavior rarely follow neatly calculated paths. Anything is possible. But it’s a discussion worth having and a POV worth considering. If you have taken the time to enter a comment that means you have thought about the material. MasterPo’s work is done.

This will by MasterPo’s only response on this topic.
If you wish to pontificate further on this subject please use email.

Many happy returns to all.

"- Physical gold is an unregistered, untraceable asset. One of the few we have left. Use your imagination as to the pros and cons.
- Being unregistered you don’t pay gains or tax on the sale (yet). If you take a gold coin to a jeweler and sell it you get cash in hand and that’s that."

Sounds very much like your endorsing tax evasion.

The Obama administration doesn't exclude food and energy to lie. *Economists* broadly do this because of their volatility. FYI, the government does in fact gather statistics for food and energy, but it isn't factored in when discussing *Core* CPI, which is a term that was explicitly defined to exclude food and energy.

Here's what your job as a responsible blogger should be, look it up!

All items, including food and energy, show a -.4% for 2009. It's plain as day fact, yet you automatically assumed for whatever reason out of complete ignorance there was inflation.

Stop insisting on spouting the same falsehoods. We are in a slightly deflationary period. Instead of long winded evasion of your mistake, how about you admit your fault, try not to rattle off false statements based on bias and assumptions, and move on?

Just like what was good for GM was good for the US is now dead, I say what is good for you is to eliminate all debt and NOT BUY US BONDS. Get a grip in that the government can control if there is inflation or not to determine TIPS rates.

My goal is to get rid of all STUFF and pay off the mortgage. In this environemnt that is the only SAFE investment I can think of.

I think it is absurd that people talk about deflation now because home prices have fallen about 25% nationwide from their 2006 peak. Big deal! What about the 200% runup home prices witnessed in the decade before that? Wouldn't price appreciation of 20-30% per year, as was common for California homes, constitute massive inflation? Of course, nobody was commenting about that, since everyone became a real estate speculator. While I'll never know the true value of gold, silver, oil, or stocks, I can tell you that median home prices that are 6-8X that of median income is a bubble--especially since homes are leveraged to a far greater extent than any of the above mentioned assets. People are still buying houses with little down, the FHA is insolvent, and taxpayers will end up paying the bill to keep "victims" in homes they bought with other people's money--which they defrauded the bank to get. I think gold will truly be in a bubble once people start selling their homes to buy gold and the commoner places a substantial portion of their net worth in the asset.

But then, what do I know? I bought gold in 2005 at $420/ounce while all the other fools were buying houses (and I sold my California house in 2005).

Mark- why end a a valid post with such unsubstantiated nonsense? I'll put a gold star next to your name for such an wonderful investment if it will make you feel good.

This article felt like an info-mertial!

Tyler, hardly unsubstantiated. I just got my timing right--by not listening to Realtors and the mainstream media, who were busily telling me to "buy houses now or be priced out forever!" and "real estate only goes up!" I bought in Visalia, California in 2002 for $130K, sold in late 2005 for $365K, and used (some) of the proceeds to buy gold. I was certainly the butt of jokes of everyone at the time.

Unsubstantiated means its unverified and unproven. Since I cant prove your claims, they are unsubstantiated. Thus it adds zero weight to any arguments- which was clearly the intention.

Example of an unsubstantiated claim:
'I was short the stock market until 3/6/09 at which point I went 100% long. I sold everything on 4/26/10.'

I think overall a few things are being glossed over in these discussions...
-All investing requires risk, to justify the corresponding reward.
--One could even argue, that FDIC insured CD's run some risk if the US government starts defaulting.
-The question comes down to whether having TIPS in your portfolio is a good diversification tool.
--We don't know what is going to happen in the future and diversification is our only weapon against this uncertainty.
---I agree with Larry Swedroe and Jared Kizer in their book "The Only Guide to Alternative Investments You’ll Ever Need"
----"The test of any investment is whether it will make a portfolio more efficient --- to produce a higher return at lower risk."
-----The more efficient your portfolio, (1) the better your chance of having more money to spend in retirement and (2) the greater the odds you won’t outlive your money.
----TIPS and Commodities (GOLD) are listed as a "Good" alternative investment
-----I keep both in my portfolio in their most liquid form (ETF & mutual funds)
-----The authors other "Good" alternative investments are Real estate (generally in the form of REITs), international equities, life annuities and stable value funds.

This article is the most significant departure in quality from the usual posts at FMF that I have seen in some time.

There's a Glenn Beck-esque incoherence and paranoia to this post that many responses in the comments above have exposed, and belongs more on a fringe political site than one that wins awards for financial blogging.

I hope this will be the last guest post from this author.

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