Recap of Upturn: Let us compare the price of Treasury Inflated protected securities (TIP), Gold (GLD), Gold Index (^GOX), Dow Jones Industrial Average (^DJI) and the 30yr. Bond (^TYX) from the week of Nov. 22nd through today. Irrational optimism caused DJI to peak just above 14000 in Oct. 2007. Gold followed the rising DJI, convinced it is infationary, peaked near $1000 per oz in March 2008. TIP also peaked at about $111 in the same period as Gold peaked. Meantime the 30yr. bond yield peaked at 5.3 around July 2007.
Downturn has tested deflationary sentiment: During the "Total Liquidation" period of fall 2008, everything sold off. Domestic Stocks, Foreign stocks, Emerging markets, foreign currencies, Gold, you name it. They all parked their money in dollar and dollar denominated treasuries. Like it or hate it, the true colors of investors were revealed. They sold off everything and parked their money in dollars, when it counted, period. Such was a flight to safety that the 30yr. bond yielded only 2.56% in Dec. 2008. Imagine lending money to the US Treasury at 2.56% for 30 years. Interpreting this another way, investors were convinced that deflation was taking over. No need to hold on to anything but dollars. After all, anything produced today can be bought with less dollars tomorrow, so no need to buy anything else. The price of TIP meantime bottomed at around $92 around week of Nov. 17, 2008. So people also sold off TIPs when the sentiment was no threat of inflation.
What happens when Inflation takes over? Presently the price of TIP has recovered to nearly $100 where it was 5 years ago. Due to printing of dollars, the Fed is trying to inject inflation. But will the treasury be honest with the inflation numbers and reward the TIP holders by boosting the yield? What will be the demand of TIPs in such an inflationary environment? TIPs are untested since they are a relatively new instrument and have not been through such an inflationary period. The behavior of the US treasury is also untested. Who knows they can be under political pressure to keep inflation numbers low, so as not to give out extra yield. In that case all the inflation planning of the common man investor will have gone to waste. Maybe that is why Gold is still the best hedge against inflation. That is a proven instrument and is at a value that more than double from where it was 5 years ago. TIP's have not kept up in price or yield. We will have to perhaps wait for a true inflationary period to get the answer.
The graph shown above is derived from finance.yahoo.com.
