Here’s something that, as the Club’s bond person, I never thought I would be talking about.
Gold in a bond portfolio as a hedge against increasing interest rates
First, if you haven’t started to restructure the fixed-income portion of your investments to accommodate increasing rates, you aren’t paying attention. And that’s irresponsible.
Rates are at all-time lows, and it is only a matter of time before they move up. How fast or how much is still up in the air. But the outcome for some bonds is not.
Increasing rates will crush the prices of long-maturity bonds, especially long-maturity Treasurys.
My solution since rates started their fall to near zero is to own bonds of seven year maturities or less. These will show the smallest price drop when the change in rates finally hit.
Corporates will show the smallest price drop overall. So, short-term corporates will be almost immune to increases.
But here’s a time-proven and not so new way to hedge the bonds in your portfolio against interest rate increases.
You won’t believe this… gold. I’m a little embarrassed I didn’t see this relationship before. It should be so obvious to anyone my age.
Back in the early ‘70s to the early ‘80s,which was the last time we saw a really big move in interest rates (do you remember a double-digit prime rate and mortgages in the high teens?), gold had a move you won’t believe.
Between 1972 and 1980, the 10-year Treasury moved from 5.8% to about 15%. Now that’s a move up!
Gold for the same period moved up 9.5 times, from just $58 an ounce to $612 per ounce.
I had forgotten how gold prices reacted to the crazy interest and inflation numbers of the seventies and eighties.
My first mortgage in 1983 was 13 5/8%. My rate today is 3 1/4%. That’s how crazy it was!
Every portfolio should have some gold as an insurance play. Yes, there are peaks and valleys. But, as a hedge against what will eventually be a run up in interest rates and inflation, gold could be the big winner.
The President of the World Gold Council, Juan Artigas, in a recent Wall Street Journal article, recommended 5% to 10% of the value of the bond portion of your portfolio in gold.
We have to use every tool available to reduce our risk. So, take a look at gold for as a hedge for your bonds.
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