TIPS Fund vs Gold Fund

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justsomeguy2018
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TIPS Fund vs Gold Fund

Post by justsomeguy2018 »

TIPS and Gold are both considered protection from inflation (if I understand correctly), but which one is better? Is one issue with TIPS that they would essentially become worthless if there were a dollar crisis or a U.S. gov't fiscal crisis (e.g. default or considerable fear of default)? In that scenario it seems like TIPS would not really be much of an inflation hedge or be valuable....or would they still be?

Gold has been soaring lately. Is it good to buy some now as a safety measure against future fiscal woes, or is this a classic mistake of "buying high"?
Elysium
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Re: TIPS Fund vs Gold Fund

Post by Elysium »

Gold average annualized returns since 2002 is about 9%!

The price of 1oz gold back then was around $350, today it is over $2000.

Think about that, a whopping 9% annualized for a shiny metal that doesn't produce earnings, dividends, or interest. US Stocks and US Long Term Bonds are slightly below that. Gold is expected to produce nothing more than keeping with inflation, and that is what it has done over it's 5000 years of existence. There may have been periods when it produced above average returns, now is definitely one of those times. Think about it for a minute, about all those other times that made it revert back to it's mean of inflation matching returns. It would require an enormous amount of underperformance from here on for it to revert back to it's historical means. It is a question of whether someone wish to roll the dice and hope that isn't imminent. You could get very very unlucky with it if the mean reversion starts now.

Interesting anecdote: 2002 is the last time I seriously considered buying physical gold bullion. The price was around $350. Bogleheads stopped me from buying gold with the same comments as today :mrgreen: I am not confusing strategy with outcome though, the advice was right back then as it is today, sometimes unpredictable things happen :wink:
Last edited by Elysium on Tue Aug 04, 2020 5:51 pm, edited 5 times in total.
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vineviz
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Re: TIPS Fund vs Gold Fund

Post by vineviz »

justsomeguy2018 wrote: Tue Aug 04, 2020 5:27 pm TIPS and Gold are both considered protection from inflation (if I understand correctly), but which one is better?
TIPS offer guaranteed inflation protection. Gold offers a small probability of rising in value with inflation.

justsomeguy2018 wrote: Tue Aug 04, 2020 5:27 pm Is one issue with TIPS that they would essentially become worthless if there were a dollar crisis or a U.S. gov't fiscal crisis (e.g. default or considerable fear of default)?
No, that’s not an issue.


justsomeguy2018 wrote: Tue Aug 04, 2020 5:27 pm
Gold has been soaring lately. Is it good to buy some now as a safety measure against future fiscal woes, or is this a classic mistake of "buying high"?
Buying after a surge in price doesn’t seem to me like a good time to make a speculative bet on a shiny metal. Others may have different opinions.
Last edited by vineviz on Tue Aug 04, 2020 5:47 pm, edited 1 time in total.
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Re: TIPS Fund vs Gold Fund

Post by 000 »

TIPS is probably better than Gold if moderate inflation happens.
Gold is probably better than TIPS if extreme inflation happens.
One can own both.
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justsomeguy2018
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Re: TIPS Fund vs Gold Fund

Post by justsomeguy2018 »

justsomeguy2018 wrote: Tue Aug 04, 2020 5:27 pm Is one issue with TIPS that they would essentially become worthless if there were a dollar crisis or a U.S. gov't fiscal crisis (e.g. default or considerable fear of default)?
No, that’s not an issue.


justsomeguy2018 wrote: Tue Aug 04, 2020 5:27 pm
Just curious why it wouldn't be an issue - would the gov't still even be able to pay out the TIPS if it defaulted?

If there were some kind of rampant hyper-inflation, would TIPS owners get an insanely high payout in interest vs. non-TIPS owners?
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Re: TIPS Fund vs Gold Fund

Post by FIREchief »

justsomeguy2018 wrote: Tue Aug 04, 2020 5:51 pm If there were some kind of rampant hyper-inflation, would TIPS owners get an insanely high payout in interest vs. non-TIPS owners?
Sure, why wouldn't we? :confused
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Re: TIPS Fund vs Gold Fund

Post by vineviz »

justsomeguy2018 wrote: Tue Aug 04, 2020 5:51 pm If there were some kind of rampant hyper-inflation, would TIPS owners get an insanely high payout in interest vs. non-TIPS owners?
Yes, they would. I don't think hyperinflation is very likely, and if it is your bond portfolio will be the least of your worries.
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Re: TIPS Fund vs Gold Fund

Post by All Seasons »

justsomeguy2018 wrote: Tue Aug 04, 2020 5:27 pm TIPS and Gold are both considered protection from inflation (if I understand correctly), but which one is better?
TIPS offer guaranteed inflation protection. The guarantee is only good under conditions of mild inflation -- it will be useless under heavy/extreme inflation. Gold doesn't provide particularly strong protection against mild inflation, but it is practically guaranteed to skyrocket under heavy/extreme dollar devaluation.
justsomeguy2018 wrote: Tue Aug 04, 2020 5:27 pm Is one issue with TIPS that they would essentially become worthless if there were a dollar crisis or a U.S. gov't fiscal crisis (e.g. default or considerable fear of default)?
Treasury bonds are practically junk, so yes it's an issue. The only reason why ratings agencies such as S&P (and the others) haven't further downgraded U.S. debt is because they fear government retaliation. Consider the following: when S&P showed the courage to be honest and downgraded Treasury bonds to AA+ they (and ONLY they) coincidentally got fined by the government for their hand in the sub-prime crisis. This is despite the fact that: 1) it's obvious that all the other ratings agencies were engaging in the same deception, and 2) a 2011 congressional report into the 2008 crisis even confirmed as much.

In other words, even as the fiscal situation continues to deteriorate in the U.S., don't expect honest ratings or warnings from the mainstream.
justsomeguy2018 wrote: Tue Aug 04, 2020 5:27 pm Gold has been soaring lately. Is it good to buy some now as a safety measure against future fiscal woes, or is this a classic mistake of "buying high"?
Gold/precious metals are pretty much a must for any portfolio claiming to be balanced. Hold it in equal risk proportion to other risk assets such as stocks, bonds, etc.
The market portfolio is always a legitimate portfolio.
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Re: TIPS Fund vs Gold Fund

Post by stimulacra »

I own both totaling about 15% of my portfolio.

It helps me sleep at night but doesn't do a whole lot year after year. It's a hedge.
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Re: TIPS Fund vs Gold Fund

Post by Crow Hunter »

Just keep in mind the history of gold in the US when you are planning your TEOTWAWKI scenarios.

https://en.wikipedia.org/wiki/Gold_Reserve_Act
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Re: TIPS Fund vs Gold Fund

Post by permport »

All Seasons wrote: Tue Aug 04, 2020 8:14 pm
TIPS offer guaranteed inflation protection. The guarantee is only good under conditions of mild inflation -- it will be useless under heavy/extreme inflation. Gold doesn't provide particularly strong protection against mild inflation, but it is practically guaranteed to skyrocket under heavy/extreme dollar devaluation.
I trust the government's guarantee against inflation about as much as I trust that "gold can merely not be obtained for several days", which turned out to be several decades.
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Re: TIPS Fund vs Gold Fund

Post by permport »

Crow Hunter wrote: Tue Aug 04, 2020 8:29 pm Just keep in mind the history of gold in the US when you are planning your TEOTWAWKI scenarios.

https://en.wikipedia.org/wiki/Gold_Reserve_Act
Oh pfffft. The government would NEVER do anything nefarious. That's just conspiracy theory territory! :P
Buy right and hold tight.
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Re: TIPS Fund vs Gold Fund

Post by GRP »

All Seasons wrote: Tue Aug 04, 2020 8:14 pm
justsomeguy2018 wrote: Tue Aug 04, 2020 5:27 pm TIPS and Gold are both considered protection from inflation (if I understand correctly), but which one is better?
TIPS offer guaranteed inflation protection. The guarantee is only good under conditions of mild inflation -- it will be useless under heavy/extreme inflation. Gold doesn't provide particularly strong protection against mild inflation, but it is practically guaranteed to skyrocket under heavy/extreme dollar devaluation.
justsomeguy2018 wrote: Tue Aug 04, 2020 5:27 pm Is one issue with TIPS that they would essentially become worthless if there were a dollar crisis or a U.S. gov't fiscal crisis (e.g. default or considerable fear of default)?
Treasury bonds are practically junk, so yes it's an issue. The only reason why ratings agencies such as S&P (and the others) haven't further downgraded U.S. debt is because they fear government retaliation. Consider the following: when S&P showed the courage to be honest and downgraded Treasury bonds to AA+ they (and ONLY they) coincidentally got fined by the government for their hand in the sub-prime crisis. This is despite the fact that: 1) it's obvious that all the other ratings agencies were engaging in the same deception, and 2) a 2011 congressional report into the 2008 crisis even confirmed as much.

In other words, even as the fiscal situation continues to deteriorate in the U.S., don't expect honest ratings or warnings from the mainstream.
justsomeguy2018 wrote: Tue Aug 04, 2020 5:27 pm Gold has been soaring lately. Is it good to buy some now as a safety measure against future fiscal woes, or is this a classic mistake of "buying high"?
Gold/precious metals are pretty much a must for any portfolio claiming to be balanced. Hold it in equal risk proportion to other risk assets such as stocks, bonds, etc.
+1 QFT
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Re: TIPS Fund vs Gold Fund

Post by nisiprius »

Just take a careful look at past behavior. The thing to be clear on is that the behavior is not similar at all. They are not two somewhat different flavors of the same thing, they are different things.

Source

Image

The Vanguard TIPS fund (red) is based on TIPS that are directly tied to the CPI index. They behave like bonds. They have had a steady upward loft from accumulated coupon interest. There is a limited amount of volatility riding on top of it because of interest rate fluctuations affecting the value of previously purchased bonds, and also possibly some liquidity issues during 2008-2009. But overall it has been a tame, boring ride. Again, it is anchored by the CPI itself.

Gold (blue) has no guaranteed linkage to the CPI at all. There is nothing that anchors it to anything but tradition and investor sentiment. It does not track "inflation," it tracks "investor fear of inflation." Although gold has been very lucrative for those who owned it, the fact that it had a spectacular run-up in 2000-2012 in the virtual absence of inflation should be troubling. You can say it is a wonderful problem to have, but the point is that it is not the way gold is "supposed" to behave. The supposed predictability and reliability are not there. It is a typical commodity with wild booms and busts.

Do not let the superior returns blind you to the fact it darn well should have had higher returns, in order to justify the higher volatility. Over the stated period--since inception of the TIPS fund, and almost since the start of TIPS themselves--gold had 2.9X the volatility, measured by standard deviation; 3.3X the maximum drawdown, which is disturbing in an asset being held for downside protection; and thus, overall, gold had lower Sharpe and Sortino ratios, meaning that the extra risk was not justified by enough extra return.

Now all that said there may be reasons why you want gold anyway, maybe you prefer the dimensions of risk implied by the blue line. Just do not think this as being a decision between two similar inflation hedges. They are different beasts.
Last edited by nisiprius on Tue Aug 04, 2020 8:50 pm, edited 1 time in total.
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Re: TIPS Fund vs Gold Fund

Post by nisiprius »

permport wrote: Tue Aug 04, 2020 8:37 pm
Crow Hunter wrote: Tue Aug 04, 2020 8:29 pm Just keep in mind the history of gold in the US when you are planning your TEOTWAWKI scenarios.

https://en.wikipedia.org/wiki/Gold_Reserve_Act
Oh pfffft. The government would NEVER do anything nefarious. That's just conspiracy theory territory! :P
I don't know where people get the idea that governments cannot regulate gold (or bitcoin).
In 'This Time is Different,' Carmen M. Reinhart and Kenneth S. Rogoff wrote:[In the fourth century B. C.] Dionysus of Syracuse, who had borrowed from his subjects in the form of promissory notes, issued a decree that all money in circulation was to be turned over to the government, with those refusing subject to the pain of death. After he collected all the coins, he stamped each one-drachma coin with a two-drachma mark and used the proceeds to pay off his debt.
Were these coins "hard currency?" Or were they "fiat money" despite their precious metal content?
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Re: TIPS Fund vs Gold Fund

Post by GRP »

nisiprius wrote: Tue Aug 04, 2020 8:47 pm
permport wrote: Tue Aug 04, 2020 8:37 pm
Crow Hunter wrote: Tue Aug 04, 2020 8:29 pm Just keep in mind the history of gold in the US when you are planning your TEOTWAWKI scenarios.

https://en.wikipedia.org/wiki/Gold_Reserve_Act
Oh pfffft. The government would NEVER do anything nefarious. That's just conspiracy theory territory! :P
I don't know where people get the idea that governments cannot regulate gold (or bitcoin).
In 'This Time is Different,' Carmen M. Reinhart and Kenneth S. Rogoff wrote:[In the fourth century B. C.] Dionysus of Syracuse, who had borrowed from his subjects in the form of promissory notes, issued a decree that all money in circulation was to be turned over to the government, with those refusing subject to the pain of death. After he collected all the coins, he stamped each one-drachma coin with a two-drachma mark and used the proceeds to pay off his debt.
Were these coins "hard currency?" Or were they "fiat money" despite their precious metal content?
I think he was being sarcastic -- and I can't tell if you're agreeing or disagreeing with him lol.
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Re: TIPS Fund vs Gold Fund

Post by 000 »

nisiprius wrote: Tue Aug 04, 2020 8:42 pm Gold (blue) has no guaranteed linkage to the CPI at all. There is nothing that anchors it to anything but tradition and investor sentiment. It does not track "inflation," it tracks "investor fear of inflation." Although gold has been very lucrative for those who owned it, the fact that it had a spectacular run-up in 2000-2012 in the virtual absence of inflation should be troubling. You can say it is a wonderful problem to have, but the point is that it is not the way gold is "supposed" to behave.
I've seen you say this multiple times. As others have pointed out to you, there has been plenty of asset inflation in Developed Markets and plenty of actual currency inflation in Emerging Markets over this time period. Gold is a global commodity.

I myself only have a small holding in Gold as I expect it to return 0% real going forward. But the responses it draws on this board are curious.
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Re: TIPS Fund vs Gold Fund

Post by 000 »

nisiprius wrote: Tue Aug 04, 2020 8:47 pm
permport wrote: Tue Aug 04, 2020 8:37 pm
Crow Hunter wrote: Tue Aug 04, 2020 8:29 pm Just keep in mind the history of gold in the US when you are planning your TEOTWAWKI scenarios.

https://en.wikipedia.org/wiki/Gold_Reserve_Act
Oh pfffft. The government would NEVER do anything nefarious. That's just conspiracy theory territory! :P
I don't know where people get the idea that governments cannot regulate gold (or bitcoin).
In 'This Time is Different,' Carmen M. Reinhart and Kenneth S. Rogoff wrote:[In the fourth century B. C.] Dionysus of Syracuse, who had borrowed from his subjects in the form of promissory notes, issued a decree that all money in circulation was to be turned over to the government, with those refusing subject to the pain of death. After he collected all the coins, he stamped each one-drachma coin with a two-drachma mark and used the proceeds to pay off his debt.
Were these coins "hard currency?" Or were they "fiat money" despite their precious metal content?
Sounds like the drachma lost value (relative to foreign currencies or durable goods), not the underlying metal.

Did Reinhart's study show that a Gold coin stamped with a two-drachma mark was worth less in neighboring kingdoms than an equivalent quantity of Gold?
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Re: TIPS Fund vs Gold Fund

Post by FIREchief »

All Seasons wrote: Tue Aug 04, 2020 8:14 pm TIPS offer guaranteed inflation protection. The guarantee is only good under conditions of mild inflation -- it will be useless under heavy/extreme inflation.
Do you have any basis for that comment, or does it just "sound good?" :P
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Re: TIPS Fund vs Gold Fund

Post by arcticpineapplecorp. »

nisiprius wrote: Tue Aug 04, 2020 8:42 pm Just take a careful look at past behavior. The thing to be clear on is that the behavior is not similar at all. They are not two somewhat different flavors of the same thing, they are different things.

Source

Image

The Vanguard TIPS fund (red) is based on TIPS that are directly tied to the CPI index. They behave like bonds. They have had a steady upward loft from accumulated coupon interest. There is a limited amount of volatility riding on top of it because of interest rate fluctuations affecting the value of previously purchased bonds, and also possibly some liquidity issues during 2008-2009. But overall it has been a tame, boring ride. Again, it is anchored by the CPI itself.

Gold (blue) has no guaranteed linkage to the CPI at all. There is nothing that anchors it to anything but tradition and investor sentiment. It does not track "inflation," it tracks "investor fear of inflation." Although gold has been very lucrative for those who owned it, the fact that it had a spectacular run-up in 2000-2012 in the virtual absence of inflation should be troubling. You can say it is a wonderful problem to have, but the point is that it is not the way gold is "supposed" to behave. The supposed predictability and reliability are not there. It is a typical commodity with wild booms and busts.

Do not let the superior returns blind you to the fact it darn well should have had higher returns, in order to justify the higher volatility. Over the stated period--since inception of the TIPS fund, and almost since the start of TIPS themselves--gold had 2.9X the volatility, measured by standard deviation; 3.3X the maximum drawdown, which is disturbing in an asset being held for downside protection; and thus, overall, gold had lower Sharpe and Sortino ratios, meaning that the extra risk was not justified by enough extra return.

Now all that said there may be reasons why you want gold anyway, maybe you prefer the dimensions of risk implied by the blue line. Just do not think this as being a decision between two similar inflation hedges. They are different beasts.
this is a great post nisi. the best I've read on this subject. It makes the points very well. I've never seen it written that way "It does not track "inflation,"it tracks "investor fear of inflation." That is really it, right there in a nutshell. But for you to add the point that it went up when there was not high inflation, is also excellent. That's the kind of thing people would say, "But so what. It went up!" which is besides the point and destroys the entire argument of it being a hedge against inflation, when it's not. So you don't know why it does what it does. Should give one pause if they stop and think about it for a moment. Fantastic. Thanks.
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Re: TIPS Fund vs Gold Fund

Post by NoRegret »

nisiprius wrote: Tue Aug 04, 2020 8:42 pm Just take a careful look at past behavior. The thing to be clear on is that the behavior is not similar at all. They are not two somewhat different flavors of the same thing, they are different things.

Source

Image

The Vanguard TIPS fund (red) is based on TIPS that are directly tied to the CPI index. They behave like bonds. They have had a steady upward loft from accumulated coupon interest. There is a limited amount of volatility riding on top of it because of interest rate fluctuations affecting the value of previously purchased bonds, and also possibly some liquidity issues during 2008-2009. But overall it has been a tame, boring ride. Again, it is anchored by the CPI itself.

Gold (blue) has no guaranteed linkage to the CPI at all. There is nothing that anchors it to anything but tradition and investor sentiment. It does not track "inflation," it tracks "investor fear of inflation." Although gold has been very lucrative for those who owned it, the fact that it had a spectacular run-up in 2000-2012 in the virtual absence of inflation should be troubling. You can say it is a wonderful problem to have, but the point is that it is not the way gold is "supposed" to behave. The supposed predictability and reliability are not there. It is a typical commodity with wild booms and busts.

Do not let the superior returns blind you to the fact it darn well should have had higher returns, in order to justify the higher volatility. Over the stated period--since inception of the TIPS fund, and almost since the start of TIPS themselves--gold had 2.9X the volatility, measured by standard deviation; 3.3X the maximum drawdown, which is disturbing in an asset being held for downside protection; and thus, overall, gold had lower Sharpe and Sortino ratios, meaning that the extra risk was not justified by enough extra return.

Now all that said there may be reasons why you want gold anyway, maybe you prefer the dimensions of risk implied by the blue line. Just do not think this as being a decision between two similar inflation hedges. They are different beasts.
A: Hey, you have a screwdriver I can borrow?
B: No, but take this Leatherman tool. It’s got a screwdriver thingy there.
A: Cool, I see it’s also got a knife, pliers and saw... Wait a second! This is not a screwdriver! I asked for a screwdriver! Gimme a screwdriver!
:oops:

Gold also acts like a currency in a time of monetary debasement which was a key consideration during It’s last run in 2000-2011 when DXY went from 120 to 70. It runs with commodities from time to time, AND it gets a bid when there are signs of deflation although there cash is still king. Let’s also not forget the bit about confidence in the financial system overall.

Gold is and has been its own thing. It has generally defied efforts to define it, although in some timeframes it’s had a good correlation to real yields. It’s had low correlation to other asset classes and will likely continue to in the future. Due to its high volatility, it can carry the portfolio in certain times even at a small weighting. TIPs on the other hand are designed to combat inflation — headline CPI to be exact. There is a finite chance that the headline CPI doesn’t match one’s personal inflation but that’s a different topic. TIPs will not protect other parts of the portfolio against inflation.

My advice to anyone regarding gold is this: if you don’t like it, don’t own it. It’s not an easy asset to own even when times are good. Own it only if you understand and believe in it.

PS I discussed my PM allocation here, although I have been selling a little into strength lately.
viewtopic.php?f=10&t=317555&p=5312769#p5312769
Last edited by NoRegret on Wed Aug 05, 2020 6:46 pm, edited 1 time in total.
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Re: TIPS Fund vs Gold Fund

Post by All Seasons »

FIREchief wrote: Tue Aug 04, 2020 8:59 pm
All Seasons wrote: Tue Aug 04, 2020 8:14 pm TIPS offer guaranteed inflation protection. The guarantee is only good under conditions of mild inflation -- it will be useless under heavy/extreme inflation.
Do you have any basis for that comment, or does it just "sound good?" :P
Right. Here’s my view. If, say, TIPS existed during the era of the Continental Dollar, the number of continentals you’d need to maintain your purchasing power would tend towards infinity as the value of the currency approached zero.

And infinity times zero is still zero.

So the TIPS can make good on their promise for delivering your currency, but the promise is no good if the currency is worthless.

Further, given that hyperinflation has already happened in America and has happened all around the world repeatedly, I don’t consider it as remote a possibility as many others do.

The further we look back into the past, the further we can see into the future.

Remember that the US dollar in its current incarnation is only 49 years old. It usually takes about that long to see fiat currencies unravel, or at least start to. Personally, I am confident in my own appraisal of the macroeconomic facts. More specifically, I think the US dollar’s days are numbered. The laws of supply and demand are not to be conned. And the supply of US dollars is increasing at an accelerating rate.

Only time will tell.
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Re: TIPS Fund vs Gold Fund

Post by Valuethinker »

000 wrote: Tue Aug 04, 2020 8:55 pm
nisiprius wrote: Tue Aug 04, 2020 8:47 pm
permport wrote: Tue Aug 04, 2020 8:37 pm
Crow Hunter wrote: Tue Aug 04, 2020 8:29 pm Just keep in mind the history of gold in the US when you are planning your TEOTWAWKI scenarios.

https://en.wikipedia.org/wiki/Gold_Reserve_Act
Oh pfffft. The government would NEVER do anything nefarious. That's just conspiracy theory territory! :P
I don't know where people get the idea that governments cannot regulate gold (or bitcoin).
In 'This Time is Different,' Carmen M. Reinhart and Kenneth S. Rogoff wrote:[In the fourth century B. C.] Dionysus of Syracuse, who had borrowed from his subjects in the form of promissory notes, issued a decree that all money in circulation was to be turned over to the government, with those refusing subject to the pain of death. After he collected all the coins, he stamped each one-drachma coin with a two-drachma mark and used the proceeds to pay off his debt.
Were these coins "hard currency?" Or were they "fiat money" despite their precious metal content?
Sounds like the drachma lost value (relative to foreign currencies or durable goods), not the underlying metal.

Did Reinhart's study show that a Gold coin stamped with a two-drachma mark was worth less in neighboring kingdoms than an equivalent quantity of Gold?
With ancient texts you don't get that. You get a piece of some 13th c AD document copied by a monk from an Arab source, that was written in the time of Dionysius' grandchildren, that alleges that the historian of the period (text now lost( was lying.

At best you get one source from the period w known and unknown biases (Thucydides or Herodotus, usually). And the whole notion of historical accuracy is "fake news" before the 18th century say.

Sometimes you then get archaeological evidence.

So the numismatic evidence in this case might line up.
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Re: TIPS Fund vs Gold Fund

Post by anoop »

Elysium wrote: Tue Aug 04, 2020 5:40 pm Interesting anecdote: 2002 is the last time I seriously considered buying physical gold bullion. The price was around $350. Bogleheads stopped me from buying gold with the same comments as today :mrgreen: I am not confusing strategy with outcome though, the advice was right back then as it is today, sometimes unpredictable things happen :wink:
Just checking -- you didn't buy gold at $350 and despite its appreciation you think it was right to not buy it?
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Re: TIPS Fund vs Gold Fund

Post by nisiprius »

000 wrote: Tue Aug 04, 2020 8:53 pm
nisiprius wrote: Tue Aug 04, 2020 8:42 pm Gold (blue) has no guaranteed linkage to the CPI at all. There is nothing that anchors it to anything but tradition and investor sentiment. It does not track "inflation," it tracks "investor fear of inflation." Although gold has been very lucrative for those who owned it, the fact that it had a spectacular run-up in 2000-2012 in the virtual absence of inflation should be troubling. You can say it is a wonderful problem to have, but the point is that it is not the way gold is "supposed" to behave.
...I've seen you say this multiple times. As others have pointed out to you, there has been plenty of asset inflation in Developed Markets and plenty of actual currency inflation in Emerging Markets over this time period. Gold is a global commodity...
1) As a US investor my interest is in US inflation. If gold, as a global resource, reflects global inflation, then even if the behavior of gold is perfectly explained by global inflation, if global inflation is very different from US inflation, that makes it dubious and unpredictable for a US investor.

2) We can investigate the effect of "asset inflation in developed markets and currency inflation in emerging markets" by looking at the US dollar return of WIP, the SPDR® FTSE International Government Inflation-Protected Bond ETF. Unfortunately it had inception on Mar 13, 2008 so we don't get to see the whole gold runup, but we get to see about half of it.

Gold price roughly doubled, 1.94X, between 4/30/2008 to 8/31/2011, even though US cumulative inflation during that time period was only 1.054X, i.e. a total of 5.4% over that multiyear period.

I say "gold doubled in the absence of inflation."

000 says "in absence of US inflation," Yes, that's right and I should have been careful to say that.

000 says, in effect, "it doubled in the absence of US inflation, but you are ignoring asset and currency inflation everywhere else, that's what caused the gold price increase. It is behaving exactly as gold advocates say it should."

I say "if the explanation is 'inflation everywhere else'--if ex-US inflation cumulatively amounted 2X during that time period--we should see it show up in the ex-US TIPS fund. Like gold, it should have more than doubled, reflecting 2X asset and currency inflation (plus bond interest icing on the cake)."

So let's add it to the chart, yellow curve.
Source

Image

From 4/30/2008 to 8/31/2011, did an investment in WIP (yellow) double like gold (blue)? No, it grew less than an investment in a US TIPS fund (red).

Gold doubled in the absence of inflation, period. There was very little inflation in the US and there was very little inflation, weighted average, outside the US. The WIP holdings, shown below, included both developed (UK, France, Italy, Japan, Australia, Canada, Germany, Spain, Sweden, New Zealand) and emerging markets (Brazil, Colombia, Chile, Israel, Mexico, Africa, Turkey, South Korea).

Image
Last edited by nisiprius on Wed Aug 05, 2020 7:54 am, edited 3 times in total.
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Re: TIPS Fund vs Gold Fund

Post by Elysium »

anoop wrote: Wed Aug 05, 2020 3:04 am
Elysium wrote: Tue Aug 04, 2020 5:40 pm Interesting anecdote: 2002 is the last time I seriously considered buying physical gold bullion. The price was around $350. Bogleheads stopped me from buying gold with the same comments as today :mrgreen: I am not confusing strategy with outcome though, the advice was right back then as it is today, sometimes unpredictable things happen :wink:
Just checking -- you didn't buy gold at $350 and despite its appreciation you think it was right to not buy it?
Gold has no expected returns other than matching inflation. It's a speculative thing subject to the vagaries of the capital markets. There is no fundamental backing for purchasing gold other than as a highly inefficient store of wealth. Speculative returns are meaningless, you could also bet at the casino and get lucky, however that is not a good strategy. To not buy gold was/is the right strategy regardless of what happened.

BTW, Gold lagged both S&P 500 Index and US LTT on a risk adjusted basis during this period, there was no pay off.
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Re: TIPS Fund vs Gold Fund

Post by vineviz »

All Seasons wrote: Wed Aug 05, 2020 2:34 am
FIREchief wrote: Wed Aug 05, 2020 1:54 am
So, I guess your answer is "no." Exactly what I expected. 8-)
The only thing you’ve demonstrated with this comment is that you don’t have a legitimate rebuttal. And thus you’ve resorted to a juvenile response as opposed to reciprocating in good faith as I did to your question.

If I don’t have a “basis” for my statement then maybe you should demonstrate why you have a basis for why I am wrong.

Otherwise, everyone on this forum will clearly see how you’ve simply embarrassed yourself.
All I see in the defense of gold is a bunch of emotional handwaving.

I’m sure those predisposed to speculate in gold must must find comfort in seeing that others share their views, but they should know that a large population of rational investors find the arguments specious.
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Re: TIPS Fund vs Gold Fund

Post by bigskyguy »

vineviz wrote: Wed Aug 05, 2020 7:53 am
All Seasons wrote: Wed Aug 05, 2020 2:34 am
FIREchief wrote: Wed Aug 05, 2020 1:54 am
So, I guess your answer is "no." Exactly what I expected. 8-)
The only thing you’ve demonstrated with this comment is that you don’t have a legitimate rebuttal. And thus you’ve resorted to a juvenile response as opposed to reciprocating in good faith as I did to your question.

If I don’t have a “basis” for my statement then maybe you should demonstrate why you have a basis for why I am wrong.

Otherwise, everyone on this forum will clearly see how you’ve simply embarrassed yourself.
All I see in the defense of gold is a bunch of emotional handwaving.

I’m sure those predisposed to speculate in gold must must find comfort in seeing that others share their views, but they should know that a large population of rational investors find the arguments specious.
This is an honest question, and I'm not trolling. So please, take it at face value.

It may indeed be true that gold is often a speculative investment, that it appears to respond irrationally and unpredictably, that it is nothing but a pretty hunk of metal, and on and on. Yet as Tyler Cowan at PortfolioCharts shows fairly succinctly, and has others have also shown, when positioned in a broader portfolio of supposed rational investments, the risk/return balance seems to steady. Please explain.

Reminds me that yogurt, which I despise, seems to cool the palate when I eat Indian, which I love.
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Re: TIPS Fund vs Gold Fund

Post by willthrill81 »

All Seasons wrote: Wed Aug 05, 2020 1:41 am
FIREchief wrote: Tue Aug 04, 2020 8:59 pm
All Seasons wrote: Tue Aug 04, 2020 8:14 pm TIPS offer guaranteed inflation protection. The guarantee is only good under conditions of mild inflation -- it will be useless under heavy/extreme inflation.
Do you have any basis for that comment, or does it just "sound good?" :P
Right. Here’s my view. If, say, TIPS existed during the era of the Continental Dollar, the number of continentals you’d need to maintain your purchasing power would tend towards infinity as the value of the currency approached zero.

And infinity times zero is still zero.

So the TIPS can make good on their promise for delivering your currency, but the promise is no good if the currency is worthless.

Further, given that hyperinflation has already happened in America and has happened all around the world repeatedly, I don’t consider it as remote a possibility as many others do.

The further we look back into the past, the further we can see into the future.

Remember that the US dollar in its current incarnation is only 49 years old. It usually takes about that long to see fiat currencies unravel, or at least start to. Personally, I am confident in my own appraisal of the macroeconomic facts. More specifically, I think the US dollar’s days are numbered. The laws of supply and demand are not to be conned. And the supply of US dollars is increasing at an accelerating rate.

Only time will tell.
There's no rational argument for hyperinflation in the U.S. occurring in the current environment. The Fed isn't going to start 'printing' enough dollars to do that.

Now maybe inflation will be higher than it's been in the past, maybe even higher than it was in the 1970s. I really doubt that, but I must admit that it's possible. But hyperinflation is often defined as 50% inflation in a single month, and that's not even remotely on the horizon.
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Re: TIPS Fund vs Gold Fund

Post by Angst »

vineviz wrote: Wed Aug 05, 2020 7:53 am
All Seasons wrote: Wed Aug 05, 2020 2:34 am
FIREchief wrote: Wed Aug 05, 2020 1:54 am
So, I guess your answer is "no." Exactly what I expected. 8-)
The only thing you’ve demonstrated with this comment is that you don’t have a legitimate rebuttal. And thus you’ve resorted to a juvenile response as opposed to reciprocating in good faith as I did to your question.

If I don’t have a “basis” for my statement then maybe you should demonstrate why you have a basis for why I am wrong.

Otherwise, everyone on this forum will clearly see how you’ve simply embarrassed yourself.
All I see in the defense of gold is a bunch of emotional handwaving.

I’m sure those predisposed to speculate in gold must must find comfort in seeing that others share their views, but they should know that a large population of rational investors find the arguments specious.
+1

Most people consider inflation effectively to be a fairly local and even a personal phenomena involving the prices of what one consumes, but gold advocates seem to have recast inflation as a macro phenomena called asset inflation. This has little relevance for someone who's going to the grocery store, a gas station, the hospital, shopping online, etc. to make a purchase.

Gold appears to be their Armageddon Insurance:
All Seasons wrote: Tue Aug 04, 2020 8:14 pm TIPS offer guaranteed inflation protection. The guarantee is only good under conditions of mild inflation -- it will be useless under heavy/extreme inflation. Gold doesn't provide particularly strong protection against mild inflation, but it is practically guaranteed to skyrocket under heavy/extreme dollar devaluation.
The international price of gold does not and never will correlate well with local inflation. I insure part of my future baseline retirement income against inflation with TIPS. Armageddon is beyond my financial purview.
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Re: TIPS Fund vs Gold Fund

Post by FIREchief »

vineviz wrote: Wed Aug 05, 2020 7:53 am
All Seasons wrote: Wed Aug 05, 2020 2:34 am
FIREchief wrote: Wed Aug 05, 2020 1:54 am
So, I guess your answer is "no." Exactly what I expected. 8-)
The only thing you’ve demonstrated with this comment is that you don’t have a legitimate rebuttal.

If I don’t have a “basis” for my statement then maybe you should demonstrate why you have a basis for why I am wrong.
All I see in the defense of gold is a bunch of emotional handwaving.

I’m sure those predisposed to speculate in gold must must find comfort in seeing that others share their views, but they should know that a large population of rational investors find the arguments specious.
Thanks. To say "gold is good, TIPS are worthless" is a bit of an extreme position, perhaps not to be taken seriously. As a point of clarification, I never commented on the usefulness of Gold. That other poster stated that:
TIPS offer guaranteed inflation protection. The guarantee is only good under conditions of mild inflation -- it will be useless under heavy/extreme inflation.
When questioned, he provided absolutely no evidence that the US Treasury wouldn't meet their commitments in a scenario of heavy/extreme inflation (which apparently he later defined as printing of an infinite number of dollars). I would consider heavy/extreme inflation to be in the 7% to 15% range, which I would fully expect to be compensated for with my TIPS.
Last edited by FIREchief on Wed Aug 05, 2020 12:58 pm, edited 1 time in total.
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Re: TIPS Fund vs Gold Fund

Post by willthrill81 »

FIREchief wrote: Wed Aug 05, 2020 10:08 amTo say "gold is good, TIPS are worthless" is a bit of an extreme position, perhaps not to be taken seriously.
I entirely agree. I also believe that the opposition position (i.e. "TIPS are good, gold is worthless") is not rational either. Further, I believe that investors can do just fine with neither TIPS nor gold, though both certainly have their place with specific strategies and/or goals, such as the LMP approach you use.
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Re: TIPS Fund vs Gold Fund

Post by Valuethinker »

FIREchief wrote: Wed Aug 05, 2020 10:08 am
Thanks. To say "gold is good, TIPS are worthless" is a bit of an extreme position, perhaps not to be taken seriously. As a point of clarification, I never commented on the usefulness of Gold. That other poster stated that:
TIPS offer guaranteed inflation protection. The guarantee is only good under conditions of mild inflation -- it will be useless under heavy/extreme inflation.
When questioned, he provided absolutely no evidence that the US Treasury wouldn't meet their commitments in a scenario of heavy/extreme inflation (which apparently he later defined as printing of an infinite number of dollars). I would consider heavy/extreme inflation to be in the 7% to 15% range, which I would fully expect to be compensated for with my TIPS.
TIPS lose inflation protection at high rates of inflation because:

- (I think) the CPI adjustment is done with a lag, and I think the investor bears the risk of that lag? So if your inflation rate is say 10% pcm, you could lose 30% of value

- US tax system taxes the gains in coupon & principal on TIPS that stem from higher inflation, even though these are not, in fact, real gains for the investor. Thus inflation protection diminishes as inflation rates rise (in taxable situations).

FWIW I took "very high rates of inflation" as triple digit pa - Israel when it was 150%, say, in the 80s. Or Turkey (several hundred per cent as I recall).
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Re: TIPS Fund vs Gold Fund

Post by Angst »

Valuethinker wrote: Wed Aug 05, 2020 10:18 amTIPS lose inflation protection at high rates of inflation because:

- (I think) the CPI adjustment is done with a lag, and I think the investor bears the risk of that lag? So if your inflation rate is say 10% pcm, you could lose 30% of value
I believe... that if one is holding TIPS to maturity, and it is primarily the principal that matters to them (vs. the accumulated interest payments over the years), those lags do not accumulate, so to speak. So the only lag that might be relevant would be for the final determination of the maturing TIPS index ratio prior to its redemption. Does that make sense? If that's the case, there shouldn't be anything close to a risk of 30% of value of inflation adjusted principal.
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Re: TIPS Fund vs Gold Fund

Post by FIREchief »

Valuethinker wrote: Wed Aug 05, 2020 10:18 am
FIREchief wrote: Wed Aug 05, 2020 10:08 am
Thanks. To say "gold is good, TIPS are worthless" is a bit of an extreme position, perhaps not to be taken seriously. As a point of clarification, I never commented on the usefulness of Gold. That other poster stated that:
TIPS offer guaranteed inflation protection. The guarantee is only good under conditions of mild inflation -- it will be useless under heavy/extreme inflation.
When questioned, he provided absolutely no evidence that the US Treasury wouldn't meet their commitments in a scenario of heavy/extreme inflation (which apparently he later defined as printing of an infinite number of dollars). I would consider heavy/extreme inflation to be in the 7% to 15% range, which I would fully expect to be compensated for with my TIPS.
TIPS lose inflation protection at high rates of inflation because:

- (I think) the CPI adjustment is done with a lag, and I think the investor bears the risk of that lag? So if your inflation rate is say 10% pcm, you could lose 30% of value
Thanks. That makes sense if you're running 120% inflation per year, not so much a concern at 15% per year.
- US tax system taxes the gains in coupon & principal on TIPS that stem from higher inflation, even though these are not, in fact, real gains for the investor. Thus inflation protection diminishes as inflation rates rise (in taxable situations).
Agreed. That said, my TIPS are 100% in tax advantaged retirement accounts, so no concern in my situation.
FWIW I took "very high rates of inflation" as triple digit pa - Israel when it was 150%, say, in the 80s. Or Turkey (several hundred per cent as I recall).
Yeah, it was never really defined what that poster was referring to. I am much more likely to take the possibility of double digit US inflation into account in my planning rather than triple digit inflation. 8-) Even at that, I'm not convinced that TIPS would be "useless." They would likely be the best investment available and price of my current holdings would sky rocket due to demand. Of course, I always hold to maturity, so that would be of no value to me.
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Re: TIPS Fund vs Gold Fund

Post by FIREchief »

Angst wrote: Wed Aug 05, 2020 10:33 am
Valuethinker wrote: Wed Aug 05, 2020 10:18 amTIPS lose inflation protection at high rates of inflation because:

- (I think) the CPI adjustment is done with a lag, and I think the investor bears the risk of that lag? So if your inflation rate is say 10% pcm, you could lose 30% of value
I believe... that if one is holding TIPS to maturity, and it is primarily the principal that matters to them (vs. the accumulated interest payments over the years), those lags do not accumulate, so to speak. So the only lag that might be relevant would be for the final determination of the maturing TIPS index ratio prior to its redemption. Does that make sense? If that's the case, there shouldn't be anything close to a risk of 30% of value of inflation adjusted principal.
It makes sense to me. IIRC, the lag is around a month, but I haven't really looked into it for awhile. Somebody will tell us. :happy
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Re: TIPS Fund vs Gold Fund

Post by FIREchief »

permport wrote: Wed Aug 05, 2020 3:42 am
FIREchief wrote: Wed Aug 05, 2020 1:54 am
So, I guess your answer is "no." Exactly what I expected. 8-)
Actually I think that All Seasons' post was pretty dang well reasoned and robust there. I don't see where he's made any real errors in his logic and his conclusion seems sensible.
Well, his argument seemed to be based upon the premise that the dollar becomes "worthless." I didn't consider that to constitute any rational basis for his suggestion that my TIPS will become "useless" under heavy inflation. If we're going to assume that the dollar becomes useless, than I'm not investing in Gold. More like farmland in a remote area and a good stock of guns, ammunition, big dogs and canned goods.
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Re: TIPS Fund vs Gold Fund

Post by nisiprius »

Valuethinker wrote: Wed Aug 05, 2020 10:18 am...US tax system taxes the gains in coupon & principal on TIPS that stem from higher inflation, even though these are not, in fact, real gains for the investor. Thus inflation protection diminishes as inflation rates rise (in taxable situations)...
This is a tax fact, not a TIPS fact. It is true for every single taxable investment there is, including stocks and gold.

For example, Jeremy Siegel--one of the few people to discuss this--presents a chart in Stocks for the Long Run showing the effect of taxation on real returns of various asset classes. From 1966 to 1982, the real return of stocks before taxes was almost exactly zero. But the real return of stocks after taxes was negative.

And exactly the same point is true of gold. Only worse, because not only is the tax on gold profits levied on number-of-dollar gains, but they are treated as collectibles (28% tax rate) instead of the usual 15%, even if it is a long-term holding. And even if it is in the form of the GLD exchange-traded product.

This point about taxes is made selectively. It is always brought up as a talking point against TIPS as an inflation hedge, and rarely mentioned when discussing stocks or gold or any "inflation hedge" but TIPS.
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Re: TIPS Fund vs Gold Fund

Post by Forester »

FIREchief wrote: Wed Aug 05, 2020 10:08 amI would consider heavy/extreme inflation to be in the 7% to 15% range, which I would fully expect to be compensated for with my TIPS.
I have some magic beans for sale if you're interested :D
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Re: TIPS Fund vs Gold Fund

Post by FIREchief »

Forester wrote: Wed Aug 05, 2020 11:18 am
FIREchief wrote: Wed Aug 05, 2020 10:08 amI would consider heavy/extreme inflation to be in the 7% to 15% range, which I would fully expect to be compensated for with my TIPS.
I have some magic beans for sale if you're interested :D
Are you suggesting that the US Treasury would not adjust my TIPS principle to account for 7% to 15% inflation? :confused
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Re: TIPS Fund vs Gold Fund

Post by FIREchief »

nisiprius wrote: Wed Aug 05, 2020 10:53 am
Valuethinker wrote: Wed Aug 05, 2020 10:18 am...US tax system taxes the gains in coupon & principal on TIPS that stem from higher inflation, even though these are not, in fact, real gains for the investor. Thus inflation protection diminishes as inflation rates rise (in taxable situations)...
This is a tax fact, not a TIPS fact. It is true for every single taxable investment there is, including stocks and gold.

For example, Jeremy Siegel--one of the few people to discuss this--presents a chart in Stocks for the Long Run showing the effect of taxation on real returns of various asset classes. From 1966 to 1982, the real return of stocks before taxes was almost exactly zero. But the real return of stocks after taxes was negative.

And exactly the same point is true of gold. Only worse, because not only is the tax on gold profits levied on number-of-dollar gains, but they are treated as collectibles (28% tax rate) instead of the usual 15%, even if it is a long-term holding. And even if it is in the form of the GLD exchange-traded product.

This point about taxes is made selectively. It is always brought up as a talking point against TIPS as an inflation hedge, and rarely mentioned when discussing stocks or gold or any "inflation hedge" but TIPS.
Great post! :sharebeer
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Re: TIPS Fund vs Gold Fund

Post by Valuethinker »

Angst wrote: Wed Aug 05, 2020 10:33 am
Valuethinker wrote: Wed Aug 05, 2020 10:18 amTIPS lose inflation protection at high rates of inflation because:

- (I think) the CPI adjustment is done with a lag, and I think the investor bears the risk of that lag? So if your inflation rate is say 10% pcm, you could lose 30% of value
I believe... that if one is holding TIPS to maturity, and it is primarily the principal that matters to them (vs. the accumulated interest payments over the years), those lags do not accumulate, so to speak. So the only lag that might be relevant would be for the final determination of the maturing TIPS index ratio prior to its redemption. Does that make sense? If that's the case, there shouldn't be anything close to a risk of 30% of value of inflation adjusted principal.
This is my vague memory.

There is a 3 month lag incorporated into the indexation of Real Return Bonds (it was longer than that, then the Canadians invented a way around that. Hurray Canada ;-)).

TIPS I believe are included. So if your TIPS were 10 years, and mature in July 2020, the inflation adjustment for the TIPS principal is from April 2010 to April 2020. This is because of the lag in compiling the CPI statistics. What I am not sure of is whether there is an adjustment, based on an estimate of that 3 month period?

So if inflation was 10% a month (well more than 120% pa - the effect of compounding) you would be repaid in money which was 3 months old? This would be 30% + compounding less in real terms.

That's what I am not completely sure of.
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Re: TIPS Fund vs Gold Fund

Post by Valuethinker »

nisiprius wrote: Wed Aug 05, 2020 10:53 am
Valuethinker wrote: Wed Aug 05, 2020 10:18 am...US tax system taxes the gains in coupon & principal on TIPS that stem from higher inflation, even though these are not, in fact, real gains for the investor. Thus inflation protection diminishes as inflation rates rise (in taxable situations)...
This is a tax fact, not a TIPS fact. It is true for every single taxable investment there is, including stocks and gold.

For example, Jeremy Siegel--one of the few people to discuss this--presents a chart in Stocks for the Long Run showing the effect of taxation on real returns of various asset classes. From 1966 to 1982, the real return of stocks before taxes was almost exactly zero. But the real return of stocks after taxes was negative.

And exactly the same point is true of gold. Only worse, because not only is the tax on gold profits levied on number-of-dollar gains, but they are treated as collectibles (28% tax rate) instead of the usual 15%, even if it is a long-term holding. And even if it is in the form of the GLD exchange-traded product.

This point about taxes is made selectively. It is always brought up as a talking point against TIPS as an inflation hedge, and rarely mentioned when discussing stocks or gold or any "inflation hedge" but TIPS.
I think though with TIPS the problem gets worse the higher the inflation rate. i.e. there is a direct relationship?

Is that true of other investments?

The notion that stocks are "an inflation hedge" is wrong - you and I have discussed this many times.

The actual correlation between stock returns and inflation is not that high. If there is one, I suspect it runs like this:

- increasing inflation is bad for stock returns (because it tends to lead to higher interest rates, which are bad for stocks, and because there are corporate tax effects which are magnified by higher inflation)

- decreasing inflation is good for stock returns (for the reverse reasons)

What is true is that "Stocks pay high real returns, as compensation to investors for their volatility. Therefore a portfolio that is weighted heavily in stocks is more likely to outperform inflation than one which is weighted towards nominal instruments (i.e. bonds)"

Another factor in favour of stocks (but of real estate even more) is that companies tend to use leverage, and inflation reduces the real value of those debts. A fixed interest rate loan is an inflation hedge.
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Re: TIPS Fund vs Gold Fund

Post by anoop »

nisiprius wrote: Wed Aug 05, 2020 10:53 am
Valuethinker wrote: Wed Aug 05, 2020 10:18 am...US tax system taxes the gains in coupon & principal on TIPS that stem from higher inflation, even though these are not, in fact, real gains for the investor. Thus inflation protection diminishes as inflation rates rise (in taxable situations)...
This is a tax fact, not a TIPS fact. It is true for every single taxable investment there is, including stocks and gold.

For example, Jeremy Siegel--one of the few people to discuss this--presents a chart in Stocks for the Long Run showing the effect of taxation on real returns of various asset classes. From 1966 to 1982, the real return of stocks before taxes was almost exactly zero. But the real return of stocks after taxes was negative.

And exactly the same point is true of gold. Only worse, because not only is the tax on gold profits levied on number-of-dollar gains, but they are treated as collectibles (28% tax rate) instead of the usual 15%, even if it is a long-term holding. And even if it is in the form of the GLD exchange-traded product.

This point about taxes is made selectively. It is always brought up as a talking point against TIPS as an inflation hedge, and rarely mentioned when discussing stocks or gold or any "inflation hedge" but TIPS.
With TIPS, if there is deflation, do you get to take a deduction?

Otherwise, if we have inflation followed by deflation, we could end up paying taxes on phantom income.

"Form 1099-OID shows the amount by which the principal of your TIPS increased due to inflation or decreased due to deflation. Increases in principal are taxable for the year in which they occur, even if your TIPS hasn't matured, so you haven't yet received a payment of principal."
https://www.treasurydirect.gov/indiv/re ... ps_tax.htm

This makes taxes with TIPS a bit more complex than for other investments where taxes are incurred only when they are sold.
Last edited by anoop on Wed Aug 05, 2020 12:53 pm, edited 1 time in total.
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Re: TIPS Fund vs Gold Fund

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I removed an off-topic post and several replies. As a reminder, see: General Etiquette
At all times we must conduct ourselves in a respectful manner to other posters.
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Re: TIPS Fund vs Gold Fund

Post by anoop »

Elysium wrote: Wed Aug 05, 2020 7:19 am
anoop wrote: Wed Aug 05, 2020 3:04 am
Elysium wrote: Tue Aug 04, 2020 5:40 pm Interesting anecdote: 2002 is the last time I seriously considered buying physical gold bullion. The price was around $350. Bogleheads stopped me from buying gold with the same comments as today :mrgreen: I am not confusing strategy with outcome though, the advice was right back then as it is today, sometimes unpredictable things happen :wink:
Just checking -- you didn't buy gold at $350 and despite its appreciation you think it was right to not buy it?
Gold has no expected returns other than matching inflation. It's a speculative thing subject to the vagaries of the capital markets. There is no fundamental backing for purchasing gold other than as a highly inefficient store of wealth. Speculative returns are meaningless, you could also bet at the casino and get lucky, however that is not a good strategy. To not buy gold was/is the right strategy regardless of what happened.

BTW, Gold lagged both S&P 500 Index and US LTT on a risk adjusted basis during this period, there was no pay off.
Stocks would have negative expected return without fed support. At least gold can hold its own (and has held it through the demise of several fiat currencies), fed or no fed.
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vineviz
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Re: TIPS Fund vs Gold Fund

Post by vineviz »

bigskyguy wrote: Wed Aug 05, 2020 9:06 am It may indeed be true that gold is often a speculative investment, that it appears to respond irrationally and unpredictably, that it is nothing but a pretty hunk of metal, and on and on. Yet as Tyler Cowan at PortfolioCharts shows fairly succinctly, and has others have also shown, when positioned in a broader portfolio of supposed rational investments, the risk/return balance seems to steady. Please explain.
Unlike productive assets, there's no underlying economic principle that would help us explain or predict what gold might increase or decrease in value.

I used to accept the common wisdom that the expected real return on gold is 0%, but nothing about gold would lead one to that conclusion. So then you're left with trying to do a risk/return optimization with no valid way of estimating your expected return.

The good news is that even with negative expected nominal returns, gold does seem to act as modest diversifier in small proportions. The difficulty is figuring out the scenarios in which that bet might pay off. It's probably not high inflation, based on the evidence so far. Maybe it's a collapse in the strength of the US dollar, but I'm sure most investors could find an easier and more reliable way to hedged that risk.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
bigskyguy
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Re: TIPS Fund vs Gold Fund

Post by bigskyguy »

vineviz wrote: Wed Aug 05, 2020 1:37 pm
bigskyguy wrote: Wed Aug 05, 2020 9:06 am It may indeed be true that gold is often a speculative investment, that it appears to respond irrationally and unpredictably, that it is nothing but a pretty hunk of metal, and on and on. Yet as Tyler Cowan at PortfolioCharts shows fairly succinctly, and has others have also shown, when positioned in a broader portfolio of supposed rational investments, the risk/return balance seems to steady. Please explain.
Unlike productive assets, there's no underlying economic principle that would help us explain or predict what gold might increase or decrease in value.

I used to accept the common wisdom that the expected real return on gold is 0%, but nothing about gold would lead one to that conclusion. So then you're left with trying to do a risk/return optimization with no valid way of estimating your expected return.

The good news is that even with negative expected nominal returns, gold does seem to act as modest diversifier in small proportions. The difficulty is figuring out the scenarios in which that bet might pay off. It's probably not high inflation, based on the evidence so far. Maybe it's a collapse in the strength of the US dollar, but I'm sure most investors could find an easier and more reliable way to hedged that risk.
I encourage all to go to Tyler Cowan's PortfolioCharts website, select the Charts tab, then on that page choose Portfolio Matrix. One will see that the Risk Parity portfolios (Permanent, Butterfly, Pinwheel, etc.) that hold 10%+ Gold show the most stable returns over time. No question that there is a give for the take, and one sacrifices some gain for stability of return. That may not be worthwhile for those who are 55 or younger. It is a tradeoff that many of us in the decumulation phase prize. I have til recently been a gold skeptic, but was always intrigued by the Permanent Portfolio. Now that I am living off my portfolio, I have gone full in on LMP (TIPS ladder + future purchase of a longevity annuity) in one bucket, and Risk Parity (Stocks, Long term treasuries, short term treasuries, Gold) with a variant of the Golden Butterfly Portfolio in the second. Could I potential do better with a more aggressive portfolio, certainly.

It doesn't have to be TIPS Fund vs. Gold.

Return of investment can trump return on investment.
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FIREchief
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Re: TIPS Fund vs Gold Fund

Post by FIREchief »

bigskyguy wrote: Wed Aug 05, 2020 2:02 pm Return of investment can trump return on investment.
:sharebeer (I've never heard that one before) 8-)
I am not a lawyer, accountant or financial advisor. Any advice or suggestions that I may provide shall be considered for entertainment purposes only.
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vineviz
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Re: TIPS Fund vs Gold Fund

Post by vineviz »

bigskyguy wrote: Wed Aug 05, 2020 2:02 pm I encourage all to go to Tyler Cowan's PortfolioCharts website, select the Charts tab, then on that page choose Portfolio Matrix. One will see that the Risk Parity portfolios (Permanent, Butterfly, Pinwheel, etc.) that hold 10%+ Gold show the most stable returns over time.
The challenge, though, is the one I mentioned: PortfolioCharts shows you what HAPPENED, not what you can EXPECT to happen. A 25% allocation to gold looks great during a period of history when it a return nearly as high as stocks.

But without a reasonable way to estimating the expected return from TODAY, how can an investor hope to make an intelligent allocation going forward? Unless you have some economic rationale which makes a +4% return more likely than a -4% return, you can't know whether you should allocate 0% of 30%. Even a "I don't know, so how about 15%?" is a speculative bet that gold will outperform both long-term Treasuries and ex-US stocks going forward. I wouldn't be comfortable making that bet, but YMMV.

Tools like PortfolioCharts are inherently period-dependent and, as such, they can lead investors to succumb to data snooping without necessarily realizing it.
"Far more money has been lost by investors preparing for corrections than has been lost in corrections themselves." ~~ Peter Lynch
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