Gold for high inflation, TIPS for low inflation?

[AgAuMoney]

The only thing I could bring myself to imaging replacing with TIPS was cash, but TIPS are doing just as badly or even worse than cash these days. And the longer-duration TIPS funds seem to have oddly stock-like behavior.

Indeed.

My problem with TIPS is two-fold:

1. The inflation computation they index is not a close match to my personal experienced inflation.
2. Even with #1, the operation of TIPS is extremely tax inefficient and will cause losses.  (Normally a gov't bill/note/bond is tax advantaged, but TIPS are not.

To me it seems like TIPS are provided solely to provide an expensive option for those who are desperate to hold large quantities of cash, or are stupid enough to use TIPS in spite of better alternatives.  (e.g. I-Bonds, amounts suitable for most individuals' and couples' cash needs.)

[AgAuMoney]

Why?

Because the more liquid assets I have, the lower proportion I need "safe" and the corollary, the higher proportion I can put at risk without risking my future.

What's interesting is that the trend appears to reverse again once you have a really huge amount.

That's true, for some people.  E.g. a few years ago it came out that Suze Orman had almost her entire portfolio in bonds, with about 1% in stocks, even tho she recommends people invest largely in stocks.

Not so true for others, e.g. Warren Buffett, George Soros, Donald Trump (not sure what his current mix is).

I think largely it is psychological.  Are you someone just looking to build up the "safe" pot to a certain target and cannot wait until it hits that target and you never have to deal with or worry about it again?  Or are you someone comfortable with businesses operating and producing for you, with some success and some failure, and just letting your investments continue in that model?

[AgAuMoney]

Currently my PP is about 40% of my investable assets.  The 60% VP is mostly in silver, gold, and individual companies.

I'm curious, of your total portfolio, about what percentage is in gold + silver?

As of Friday, about 28.5%.  I don't have a breakdown how much is gold vs. silver, but since it is mostly in CEF and they generally run close to 1:1 (by value) it is probably close to that.  I've seen my percentage above 35%, but stocks have been on a tear lately, gold and silver not so much.

[AgAuMoney]

AgAuMoney, what is your take on why mining stocks continue to do so poorly?

I attribute it primarily to uncertainty.

In this case, the cost of production figures are all over the map, and in large part because of energy costs.  Some of the big producers are quoting numbers that as recently as 5 years ago would have made them unprofitable.  They are currently profitable, but less than a year ago as gold and silver really haven't done much in a year, while costs have climbed.

Will gold and silver go up?  Faster than energy?

Or will we get the deflationary recession the Fed is frantically trying to prevent?

Or maybe the economy really is recovering and good days are on the horizon?

I don't think anyone has much certainty these days.

When future profitability is in this much doubt, it is hard to have much faith in mining companies and their ability to produce profits for investors.

[vnatale]

So we hold gold because it protects us from devastating inflation and negative real interest rates. In the face of slight-to-moderate inflation, we hold T-bills, which will (probably, hopefully) at least keep pace. But what if they don't? They certainly aren't right now. And historically, gold didn't do a lot to protect people from the moderate inflation in the 80s and 90s. A goldbug worried about the very real destructive power of 4-6% inflation would have been devastated.

I know TIPS are very unpopular here, on the basis that you can't rely on a government product that supposedly protects you from a government-created problem. I agree when we're talking about high inflation--a condition in which TIPS have never been tested. But TIPS have been tested pretty thoroughly under conditions of low to moderate inflation, and it seems like they've performed as expected so far.

This is just a thought, and I haven't implemented it (nor do I think I will), but has anyone considered dividing their gold holding between gold and TIPS on the theory that both together will provide a better hedge against all types of inflation than just gold, which protects you best during high inflation?

Backtesting reveals that this adjustment would have slightly reduced returns, but halved the volatility. Here's a portfolio that splits the gold allocation between gold and TIPS:



Compared to the standard PP:



Thoughts?

Pointedstick makes the case for holding TIPS.....

Vinny