Right or wrong, gold is widely viewed as an inflation hedge—a reliable measure of protection against purchasing power risk. The precious metal may not be the best option for that purpose, though.
Some gold investors fail to consider its volatility and its opportunity cost, while others fail to anticipate storage needs and other logistical complexities of gold ownership. For these and other reasons, some view U.S. Treasury bills as a superior safe-haven alternative to gold.
Both asset classes have their own sets of pros and cons. Here’s a look at them.
Key Takeaways
- Gold is often hailed as a hedge against inflation—increasing in value as the purchasing power of the dollar declines.
- However, government bonds are more secure and have shown to pay higher rates when inflation rises, and Treasury Inflation-Protected Securities (TIPS) provide built-in inflation protection.
- Certain exchange-traded funds (ETFs) that invest in gold and hold Treasuries may be the ideal solution for most investors.
Slow but Steady vs. Gold Fever
Like any other investment, gold fluctuates in price. Investors may have to wait long stretches to realize profits, and research shows that the majority of investors enter at a time when gold is near a peak, meaning the upside is limited and the downside is more likely.
Meanwhile, slow but steady Treasuries provide less excitement but reliable income. The longer the gold is held over Treasuries, the more painful these opportunity costs can also become, due to sacrificed compound interest.
An arguably lesser but no-less-present worry: Some gold investors must contend with the chore of safely storing their investment by vaulting it at home or acquiring a safe deposit box at the bank. But in either scenario, bullion coins that are held for one year or longer are classified as collectibles—similar to artwork, rare stamps, or antique furniture. Whether the precious metal is in the form of an American Eagle gold coin, a Canadian Gold Maple Leaf coin, or a South African Krugerrand, its sale automatically triggers a long-term federal capital gains tax rate of approximately 28%—nearly double the 15% capital gains rate for typical stocks.
All of that said, gold has fared better than silver, platinum, and palladium recently, as well as most other precious metals. In 2020, the price of gold jumped 28%. Through 2021 and into 2022, the price of gold has stayed fairly consistent. However, gold’s price has always fluctuated, like any other investment. In light of this trajectory, many believe gold’s future performance is uncertain and favor a shift to Treasuries.
$1,932
As of Jan. 31, 2023, the price of gold per ounce.
The Case for Treasuries
The biggest draw in buying Treasury bonds instead of gold is that theformer locks in certain returns on investment. Prescient investors who saw fit to buy $10,000 in 30-year Treasury bills in 1982 would have pocketed $40,000 when the notes reached maturity with a fixed 10.45% coupon rate. Of course, the days of double-digit-percent coupons may be long gone. Nonetheless, such bonds can still comprise a key element to any risk-averse portfolio.
Still, the U.S. government does offerTreasury Inflation-Protected Securities (TIPS), a simple and effective way to eliminate inflation risk while providing a federally guaranteedreal rate of return. As inflation rises, TIPS adjust in price to maintain their real value.
One drawback is that TIPS usually pay lower interest rates than other government or corporate securities, so they are not necessarily optimal for income investors. Their advantage is mainly inflation protection—but if inflation is minimal or nonexistent, then their utility decreases. Another risk associated with TIPS is that they can create taxable events when semiannual coupon interest is paid.
The ETF Option
Depending on your income level, Treasury investments are typically more favorable tax-wise. But gold investors may level the capital gains tax playing field by investing in gold exchange-traded funds (ETFs), such as the VanEck Gold Miners ETF (GDX).
Gold ETFs are taxed exactly like typical stock and bond securities.Within the ETF framework, investors may participate in three distinct ways: gold mining ETFs, benchmarking against mining companies, and investing based on the appeal of not being interested in actual commodity ownership.
Because these funds hold a combination of contracts and cash—usually parked in Treasury bills—they’re able to generate interest income to offset expenses.
The SPDR Gold Trust (GLD) is the largest physically backed gold exchange-traded fund (ETF), with a total of more than $56 billion.
Finally, there are pure-play ETFs, which strive to reflect the performance of gold bullion by directly investing in gold trusts. Bullion bars are purchased, stored in bank vaults, and insured. While pure-play ETFs may track the bullion more closely, they have the disadvantage of being taxed more heavily than other versions.
Is It Better to Buy Gold or Treasuries?
There are advantages and disadvantages to buying either gold or Treasuries. Gold is often hailed as a hedge against inflation—increasing in value as the purchasing power of the dollar declines. However, government bonds are more secure and have shown to pay higher rates when inflation rises, and Treasury Inflation-Protected Securities (TIPS) provide built-in inflation protection. Certain exchange-traded funds (ETFs) that invest in gold and hold Treasuries may be the ideal solution for most investors.
What Are the Advantages of Buying Gold Over Treasuries?
Gold is popular among investors because it can be used as a hedge against currency devaluation, inflation, or deflation. It’s also liked for its ability to provide a safe haven during times of economic uncertainty. When it comes to gold and taxes, depending on your income level, Treasury investments are typically more favorable tax-wise.
What Are the Disadvantages of Buying Gold Over Treasuries?
Like any other investment, gold fluctuates in price. Investors may have to wait long stretches to realize profits, and research shows that the majority of investors enter at a time when gold is near a peak, meaning the upside is limited and the downside is more likely. It’s important to scrutinize the related expenses of each type of gold investment.
What Are the Advantages of Buying Treasuries Over Gold?
Treasuries lock in a certain amount of return on investment, and the U.S. government offers Treasury Inflation-Protected Securities (TIPS), a simple and effective way to eliminate inflation risk while providing a real rate of return that is federally guaranteed. As inflation rises, TIPS adjust in price to maintain their real value. In other words, with TIPS, the principal amount is protected since investors will never receive less than the originally invested principal.
What Are the Disadvantages of Buying Treasuries Over Gold?
One drawback of Treasury Inflation-Protected Securities (TIPS) is that they usually pay lower interest rates than other government or corporate securities, so they are not necessarily optimal for income investors. Their advantage is mainly as a protection against rising inflation.
Another TIPS risk is that they can create taxable events when semiannual coupon interest is paid.
The Bottom Line
Knowing when to bow out of gold can be a tough call. As a hedge against inflation (and geopolitical risk), gold has ascended to great highs over the past decade due to liberal central bank policies, such as the Federal Reserve’s recent quantitative easing programs, meaning monetary policy to increase the domestic money supply and spur economic activity. Gold could rally or fall further; no one can predict which way it will go.
On the other hand, there is less speculation, but also less expectation of a significant gain, withTreasuries. Savvy investors should take a sober look at gold vs. Treasuries in their portfolios and construct an allocation mix that best suits their temperament and time horizon.
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1. Gold as an Inflation Hedge:
- Gold is often considered a hedge against inflation, appreciating in value as the purchasing power of the dollar declines.
- The precious metal's historical performance during times of economic uncertainty and currency devaluation is highlighted.
2. Volatility and Opportunity Cost of Gold:
- Gold's volatility is discussed, emphasizing that investors may experience long waiting periods to realize profits.
- The article points out the opportunity cost associated with holding gold, especially in comparison to slow but steady investments like Treasuries.
3. Storage and Logistical Complexities of Gold Ownership:
- The logistical challenges and storage needs of owning physical gold, including the classification of bullion coins as collectibles and the associated tax implications.
4. U.S. Treasury Bills as a Safe-Haven Alternative:
- The suggestion that U.S. Treasury bills may be a superior safe-haven alternative to gold due to their security and certain returns on investment.
5. Treasuries and Treasury Inflation-Protected Securities (TIPS):
- Treasury bonds are highlighted for their security and historical higher rates during inflationary periods.
- Treasury Inflation-Protected Securities (TIPS) are introduced as a way to eliminate inflation risk while providing a federally guaranteed real rate of return.
6. Gold ETFs as a Compromise:
- The article suggests that certain exchange-traded funds (ETFs) investing in gold and holding Treasuries may be an ideal solution for most investors.
- Gold ETFs are discussed, including their taxation similarities to typical stock and bond securities.
7. Advantages and Disadvantages of Gold vs. Treasuries:
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Advantages of gold include its use as a hedge against currency devaluation, inflation, and economic uncertainty.
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Disadvantages of gold include price volatility and potential waiting periods for profits, with scrutiny required for related expenses.
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Advantages of Treasuries include a locked-in return on investment and the availability of Treasury Inflation-Protected Securities (TIPS) for inflation protection.
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Disadvantages of Treasuries include lower interest rates for income investors, and TIPS may create taxable events during coupon interest payments.
8. ETF Options for Gold Investors:
- Different types of gold ETFs, including those investing in gold mining, benchmarking against mining companies, and pure-play ETFs directly investing in gold trusts.
9. Speculation on Gold vs. Treasuries:
- The article acknowledges the uncertainty of gold's future performance and contrasts it with the less speculative nature of Treasuries.
10. Consideration of Time Horizon and Temperament:
- The importance of investors considering their temperament and time horizon when deciding between gold and Treasuries in their portfolios.
In summary, the article provides a comprehensive overview of the considerations and trade-offs associated with investing in gold and U.S. Treasury securities, offering insights into their respective advantages and disadvantages.
