Where's the 'Protection' in TIPS? Better to Go with Silver and Gold

Every investment product on planet earth is designed to at least offer a chance at a positive, real after-tax return. Put another way, all investments are designed to bring you a return that is greater than the rate of inflation. Some offer a higher stated yield because of their inherent risk, while others display smaller yields due to their perceived relative safety. But all true investments are designed to outpace inflation.

It is ironic, then, that the only true investment to ever bake in a negative return after inflation is Treasury Inflation Protected Securities-ironic because the very purpose of TIPS existence, of course, is to provide for a guaranteed real return. In fact, TIPS recently yielded a negative return for the first time since their inception in 1997. The 5-year TIPS note ended February 29th at a -.043% and remained negative through most of the month of March.

Comparing TIPS to a genuine inflation hedge like gold reveals their ineptness as an inflation-protected product. Since President Nixon broke the gold window in 1971, gold has soared from roughly 35$ an ounce to $950 per ounce as of this writing. That equates to an annual return of 9.33%, while TIPS have returned an average annual rate of just 5.4% since 1997.

The standard five-year Treasury Note now yields 2.45%. Meanwhile, today's 5-year TIPS yield is only a slightly positive .07%, implying that investors' anticipated rate of inflation over the next five years is just 2.38%. That means investors expect a dramatic decline in inflation rates from the current "official" rate 4.1%-- which itself is likely understated. Such expectations are untenable given the actions taken by the government and Fed over the past 7 months.

In fact, today's inflation rates should escalate due to the current excessive rate of monetary creation. Money of Zero Maturity [MZM] is currently rising at an annualized rate of 36.8%, while the Fed Funds rate is at a historically low, inflationary level.

As most know, the Fed Funds target is currently 2.25% while the effective Federal Funds rate is now trading at 2.09%. Putting this rate in historic terms, the rate on the effective Federal Funds rate traded above 2.15% in January of 1962 and remained above that rate until November of 2001 when it declined to 2.09% for the first time in nearly 40 years.

Already, this key interest rate is back to the post-9/11, post dot-com "emergency level, a rate which of course engendered the now-defunct housing bubble and today's secular bull market in most commodities.

All the while, commentators from far and wide have been quick to call the recent commodities correction the actual bubble which has burst. Quite the contrary; given this inflationary monetary backdrop, it is time to take advantage of the recent pullback in precious metals. Investors need to place their money in a real inflation hedge, and that is gold. streetTracks Gold ETF (GLD) and iShares Silver ETF (SLV) can be added to on pullbacks.

Comments

[closedendtrader]

I'm not a fan of TIPs at current yields, but you're drawing the wrong conclusion above:

"The standard five-year Treasury Note now yields 2.45%. Meanwhile, today's 5-year TIPS yield is only a slightly positive .07%, implying that investors' anticipated rate of inflation over the next five years is just 2.38%. That means investors expect a dramatic decline in inflation rates from the current "official" rate 4.1%-- which itself is likely understated. Such expectations are untenable given the actions taken by the government and Fed over the past 7 months."

The reason that investors are willing to buy TIPs with an implied inflation rate of only 2.38% is that if inflation stays at the current 4.1%, they'd earn a 4.17% return, far better than the 2.45% return on the regular Treasury. TIPs are overvalued because regular Treasuries are even more overvalued, a function of the credit crunch fears.

[User 142738]

Comparing the return on gold and silver over 30 years to the return on TIPS (or anything else) for the past eleven years is logically flawed.

[marxbites]

Logically flawed? How so?

The only thing logically flawed is a nation that has allowed itself this past 100 years of compulsory indoctrination, to be the clueless dupes of statism financed by banking fraud, and the outright theft via both inflation, and the income taxation that was not required before the people were additionally saddled with paying interest for using their own money - an expense the people DID NOT HAVE prior to the Fed's creation by bankings biggest competitiors looking to get well politically instead of by merit within a free market via competition.

Now we have taxpayers yet again (S&L's) bailing out those who only risk OPM to begin with - the very reason they so easily fail - they are unaccountable and risk NOTHING of their own capital.

Metals backed currency nor truely free markets have NEVER failed - the ONLY real failures are markets and money with the grubby hand of govt and those it privileges corrupting them.

Even Greenspan before his govt seduction stated gold and free markets were inseparable and necessary components of freedom and limited govt.

Now we have UNlimited govt and trillions of debt accruing on generations of the unborn in a fashion the Founders would accept in no way, shape or form.

[User 142738]

It's logically flawed because 11 does not equal 30. The author could've just mentioned the precious metals' moves during the past 11 years instead. It would've even made a better point (11.6% average yield between 1997 and 2008).

If I mentioned a misspelled word, would you think that was a conspiracy as well?

[marxbites]

When comparing annual ROR what's the diff?

And ur point about conspiracies is? I mean history is riddled with real live, did happen, planned and carried out conspiracies, right? From Brutus to the "Federal Reserve" it is neither of, to 9/11 & CDO's etc.

I was not inferring that anything u said was invalid except that annual rates ARE perfectly logically comparable ergo not flawed.

I went on to expand on the story's meat - our corrupt, for profit, privately owned, govt sanctioned monopoly banking cartel Fed, that not only has exactly lived up to Jackson and the Founder's admonitions and defamations, (who were also fully aware of the predicament and reasons of KGIII's scramble for interest revs and rightly wanted NONE of it, except'g Hamilton), but has depreciated (which only happens with fiat or by debasement) the dollar down to a purchasing power of three cents worth of 1913 goods or services today - and yet an oz. of gold buys today what it did 200 or 2000 years ago almost to a "T" and in our lifetimes has tracked oil near perfectly.

That is all.

What's worse is that w/o the Fed in the "nick of time" to finance re-rigged WW1 as early as 1909 in the planning, that w/o purposely atrocious Versailles, Hitler would never had emerged. Not only that but Germany had already offered cease fire - it was rejected because Col House told UK if a ship was sunk, we'd enter no problem, and Rothschild via Lord Balfour would get their chunck of Palestine for getting US into the war.

Just because govt, media and academe have spent billions of our own money keeping these real truths from Americans for over 100 years, would U call that a conspiracy?

What of the Kaiser's or Hilter's nationalist/militarist youth in preparations for battle with compulsory education? Where do we think Americans got the ideas the whole progressive/socialist/... movement was based on?

Our corporatists were drooling at the prospect of themselves and govt sharing the market between themselves and squashing any pesky competition foreign or domestic just as they did. This era of the consolidation of power in the quasi-govt/corporate/b... run machine was worldwide and we copied it directly from the Euro-dictators. Now the world has it full blown and we are about to reap what criminals have sown on our behalf.

[fallingdollar? Youdon't say!]

i have read many of your articles at www.greenfaucet.com
and elsewhere... I agree with you but you have made this case better before. tips are a raw deal though

[DaveyH]

Thusfar the insurance aspect of TIPs has not been explored. Consider that a certain part of the cost of TIPs is esentially a premium paid to protect against catastrophic inflation, perhaps engineered by the Fed to save the mortgage market, Fannie, Freddie, etc. Then TIPs in the portfolio would become the salvation of retirees living on interest income.

[jt]

marxbites...thank you for taking the time. I know it's frustrating trying to confuse people with the facts, since the majority, esp in this country, are offended by them. The campaign by the mainstream media et al (also controlled by the powers that be, even worse than Pravda was in the heyday of the USSR, and ALWAYS a part of the conspiracy...obfuscati... of the truth) to outlaw the word "conspiracy" has been very successful. All one has to do is call something a "conspiracy" or a "conspiracy theory" and the majority of the sheeple people automatically conclude it's a lie or a gross exaggeration.

It always amazed me that Hollywood allowed a movie by the name "Conspiracy Theory" where it actually turns out to be true that there was a conspiracy. Of course, the conpiracy had NOTHING to do with the systematic confiscation of wealth from and destruction of America's working class by intl bankers, just some cloak and dagger mind-control nasty stuff by some very bad military types.

What most who read this board won't understand is that what you just wrote is just the tip of the iceberg that in reality has already sunk the U S Titanic of America. The rabbit holes go MUCH deeper and the destruction is much worse than words alone can describe. But the majority won't get it even as and AFTER it happens, as the blame will be laid at the feet of anything and anyone but those who are responsible...the Fed, the intl bankers who were given this power that our forefathers warned us about, and the Congress that allowed them to stay. They handed this country over to them in 1913 and we are now seeing the end results. Ron Paul was the only candidate who saw and sees the truth, and he was basically blacklisted and labeled as a kook. So much for the love of truth in this country. The "Rothschilds"... themselves (one of the main two intl banking families that own by now some fraction of the total globe monetarily) back in the 20th century told us the plan:

Mayer Amschel Bauer, who founded the Rothschild family had said, "Give me control of a nation's money and I care not who makes the laws"
His son, Amschel Mayer Rothschild said, "Permit me to issue and control the money of a nation, and I care not who makes its laws."
Another son, Nathan Mayer Rothschild bragged, "I care not what puppet is placed upon the throne of England to rule the Empire on which the sun never sets. The man who controls Britain's money supply controls the British Empire, and I control the British money supply." [just replace "England" "Britain's" "British Empire" and "British" with "the USA" "America's" "American Empire" and "American" and second verse is same as the first.]
His sons learned well. Do you get the picture? They didn't waste their time with electoral politics. They understood the levers of control.

If the citizens of this country were EVER to take back control of it, the Fed would be the FIRST that has to go...and the money supply would have to be back under the control of Congress, which was under the control of the states thru representatives, just as our forefathers established, and have a backing of gold and silver. Have we gone too far for that to happen? I would say sadly Yes...short of a complete collapse. But even then, my fear is that the collapse has been planned, and that instead of the by then totally impoverished, but also fat and lazy and complacent, people of this country rising up to throw off the oppressors and start again, they will simply roll over and allow this once great country to become just another trophy in the war room of those wanting and working toward a one world govt for decades and even centuries. jt

[marxbites]

You hit the proverbial nail right smack dab on it's head!!

I too fear, more than losing my own life, that the evil doers ARE executing their plan. That this like the GD that brought socialism and fascism directly into our very fabric, this great financial debacle will be used for no less traitorous purposes.

Ron Paul TRUELY was America's last and best hope of beginning the ending of the corruption and outright theft of the people's ability to pursue happiness, by first and foremost restoring our economic freedom from the thieves and murderers that stole it who have plotted ALL our wars for their own profit and power. Ron Paul will be written in on my ballot no matter what.

Damn the govt made sheep, who like myself was too misinformed to know better. BOTH parties are festering pussholes controlled from above - they are worse than false choices in their rank deceptions.

For those who care enough to learn the REAL truths that govt, media and academe purposely denied Americans please get the truth from these non-partisan websites:

The Ludwig von Mises Institute - Mises, Hayek's mentor, escaped Austria to warn the world of rising statism (I have invested 100's of hours study here because it's so damn good w/dozens of scholars and free mp3 and video lectures - I'm never w/o some when on the road)

mises.org

Ed Griffin, author of "The Creature from Jekyll Island" has this excellent site & his videos re: the Fed at google and youtube are must sees!

freedomforceinternatio...

Foundation for Economic Freedom - an excellent site

fee.org

The Independent Institute

onpower.org

These will keep the average public educated automaton busy with information that blows up nearly everything that self interested educrats have shoved down our throats for over 100+ years now.

Like fellow patriot jt says - this may be planned - but we should look at it as an opportunity to inform friends, families and neighbors, everyone we know, as to the whys and how to make our lives better w/a return to constitutional govt of, by and for the people instead of govt all for itself on the people's backs and lives.

[James Davis]

The performance comparison of 10 years of TIPS (or anything else for that matter) and gold since $35 an ounce is not flawed. It's ludicrous.

For one, that $35 was an artificial low price, and reflected nothing related to true value.

Second, the risk or volatility is not comparable.

And if you bought gold at or near the highs in the late 70's you got your butt whooped for 25 years.

You may not like TIPS, but thats no excuse for a bogus comparison.

[maynardgkeynes]

Your blog is shockingly inept. With 4+% inflation, a 2.75% money market is a lot worse than TIPS. Moreover, 20 year tips are at 1.8% plus inflation, which is a strong case for owning thm at this juncture. Bingo on the point that they are insurance against another Jimmy Carter presidency, which killed Ma and Pa saver. They should be in TIPS instead of the equity portfolios that the mutual fund industry is pushing at retirees. I won't even mention the bad advice dished out by 99% of the commission brokers. Disgraceful.