Over the short term, he says, gold is a very unreliable inflation hedge. It is only over the long term that it can be a decent hedge — and he emphasizes that this long term must be measured over many decades at a minimum.
Based on the markets’ recent behavior, Erb is confident that if inflation and Treasury yields were both to rise over the next couple of years, the most likely outcome still would be a lower gold price.
What steps should you take in your portfolio if you think inflation is about to heat up? Erb acknowledges that there isn’t a great short-term inflation hedge. But he says that intermediate-term government bond funds should largely hold their own when inflation and interest rates rise, since they can reinvest in higher-yielding issues as their older bonds mature, thereby absorbing the losses of principal caused by those higher yields.
Erb points to the surprising resilience from 1966 through 1981 of intermediate-term U.S. government bonds — those with five-year maturities. This 16-year period is often considered the worst environment in recent history for bond investors, since intermediate Treasury yields nearly tripled. Nevertheless, according to Ibbotson Associates data, these bonds produced a 5.8% annualized return over the period