rmelvey wrote:In many ways I think the blend of LTT and gold was a way of creating a TIPs like investment before they existed. .... I think a blend of 75% TIPS is reasonable, but why not have the gold and LTT in there as well. The more diversification the better right?
In more 'normal' times maybe yes as under such conditions there's not that much difference between inflation and conventional bonds. In the current era however its different. Would you buy a bond from a company that for each bond it sold to you it printed another and gave it freely to itself? Collecting taxes on the interest it paid to you as well as collecting a yield from the free bond it held itself.
Of all investment grade gold, around twice as much is held by central banks as by private investors.
If the central bank of Melv had 10 bonds outstanding of which the central bank of Clive held 5, but then Melv opted to double up the number of outstanding bonds by printing another 10 to give to himself (at no cost), then Clive is also going to print more of his own bonds, selling some and using the proceeds to buy more of Melv's, and keeping some for himself. Both will see their currency devalue, but in lockstep to each other, gold rises, but if both Melv and Clive own two-thirds of all gold between them anyway (and gold accounts for only 2% of total world investment assets (stocks, bonds, gold))!! The end game is that neither Melv nor Clive lose out, only those that privately bought Melv's and Clive's bonds. Clive still receives a similar yield from his Melv bond holdings, except perhaps instead of 4% from 5 bonds he receives 2% from 10 bonds.
With TIPS the yield you receive is depicted by the rate of inflation, not by how many free bonds the issuer might have printed to give to itself. A risk with the above game is that Clive might reach a point when he is unable to sell any more bonds at a reasonable price/yield, in which case Clive's inflation rate might suddenly soar. Whilst gold in Clive's currency terms might soar under such conditions, in Melv's currency gold might remain unchanged (as was the case during the Icelandic crisis in 2008. In their own currency gold soared, in Euro's gold remained level). 25% gold holdings for an Icelandic saw no greater benefit than had they held 25% in US$ or Euro's.
Potential gold and treasury bond self interest manipulation by major/majority holders is a risk that is perhaps best avoided until more normal times resume. Marginally negative real yields from each TIPS bond bought can be countered by marginally decreasing TIPS weighting and increasing stock weighting to compensate. Or by diversifying into inflation-bond like alternatives.