Should You Still Be Buying Gold?

Unless you’ve been living in a mine, it would have been hard to miss gold’s most recent glittering run. Increasingly, people who would have never considered the stuff as an investment are pondering whether to buy it. But those who haven’t yet figured out if they want to join the gold party might be surprised at the indicator some pros are looking to for the answer: the boring, not very glamorous 10-year Treasury bond.

In theory, the direction of both gold prices and Treasury yields reflects what investors think about inflation and the health of the U.S. economy. But these days it appears the two are looking at decidedly different facts. While gold prices have soared to around $1,059 per ounce, the yield on the 10-year Treasury is only 3.4 percent, lower than early in the summer and lower than even a year ago. Gold’s steep price indicates that many buyers are sure the U.S. government’s trillion-dollar deficit will lead to rampant inflation and a potential collapse of the U.S. dollar. Since gold holds its worth if the dollar loses value, it has been a haven for fearful investors for decades. But bond investors don’t seem to be sweating at all. If they were really worried about inflation, analysts say, bondholders would demand much higher interest rates on Treasurys. “In one market they’re ignoring inflation’s impact, and in the other they’re banking on it,” says Jeffrey Kleintop, chief market strategist at LPL Financial.

So who’s right? Over the long run, Warren Buffett and others say higher inflation is inevitable unless the government curbs spending (good luck with that). If that’s the case, experts say a little gold, perhaps 5 percent of a portfolio, can provide a good hedge against a decline in the value of the dollar. (Individual investors can get the shiny yellow metal easily enough through an exchange-traded fund such as the SPDR Gold Shares (GLD) or buy gold coins directly from the U.S. Mint.) In the short term, however, the bond guys may be right. The recession has left a lot of idle factories and excess inventory, so even if the economy does come back, ample supplies of numerous goods, such as houses and cars, could keep a lid on inflation. That argument trashes the rationale for the most recent run-up in gold. And based on supply-and-demand alone, gold should be trading between $680 and $880 an ounce, says Jon Nadler, senior analyst with commodities dealer Kitco Metals. Recent history certainly favors the bond guys. In the spring of 2008, many economists and investors were afraid of inflation, and gold prices soared toward $1,000. But inflation remained in check, and gold’s price tumbled more than 30 percent in a matter of months. Bonds? Yields fell dramatically, and investors in Treasurys made a killing.