The Better Inflation Hedge: Gold or Treasuries? (2024)

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.

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.

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.

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.

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.