Morningstar economist Preston Caldwell says investors concerned about an inflationary resolution to the U.S. debt problem may be better served by Treasury Inflation-Protected Securities than gold after the precious metal’s multi-year rally.
Caldwell Questions Gold’s ‘Debasement’ Trade
Caldwell states that the multi-year gold rally stemmed from price momentum rather than inflation expectations. He notes 30-year breakeven inflation rates remained anchored near 2.3% for the last five years.
“After a long runup in prices, gold is probably no longer the best way to protect against a surge in inflation and debasement in the US dollar,” Caldwell said.
Imminent Market Volatility?
The pivot from gold coincides with price fluctuations ahead of the Federal Reserve’s Sept. 15-16 meeting. Gold recently dropped from an August peak of $4,685 to around $4,400. Rick Kanda, Managing Director at The Gold Bullion Company, cited a 60% probability of a rate hike.
“I predict that September could be another highly volatile month for the precious metal, with potential for sharp gains as well as pullbacks,” Kanda said.
Kanda warned that investors must prepare for prices to “potentially fall towards the low-$4,000s if rate-hike expectations continue to rise.”
The TIPS Alternative Strategy
To bypass precious metal volatility, Caldwell recommends targeting inflation directly through market breakevens by rotating out of nominal bonds.
“Betting on breakevens means going long TIPS and short nominal bonds,” Caldwell stated.
Because current pricing assumes the Fed will hit its long-term inflation target, Caldwell explained, “if inflation turns out higher, then you’ll come out ahead. If there’s an inflation crisis, then there’s a lot of upside.”
Economic Drivers Behind Yields
Caldwell attributes much of the recent rise in Treasury yields to stronger economic and labor-market expectations, sticky core inflation and AI-driven investment, while arguing that the fiscal impact is more about increased debt supply than an imminent debt crisis.
He notes that while the Congressional Budget Office projects federal debt will reach 175% of Gross Domestic Product by 2056, this forecast remains practically unchanged from early 2024.
Caldwell’s analysis suggests that higher yields are not primarily signaling an impending debt crisis, while he argues that TIPS offer a more direct hedge against an inflationary debt problem than gold after its substantial rally.
How Have Gold and Stock Market Performed?
Gold Spot US Dollar dipped about 0.15% to hover around $4,395 per ounce, at the last check. It was up around 21.1% over the year, and fell about 14% over the last six months.
The SPDR Gold MiniShares Trust (NYSE:GLDM), tracking the performance of the price of physical gold bullion, closed 0.93% higher at $87.03 on Thursday, and it was about 1.94% higher year-to-date.
The S&P 500 index has advanced 11.34% year-to-date. Similarly, the Nasdaq Composite index was up 12.99%, and the Dow Jones gained 8.26% YTD.
On Wednesday, the SPDR S&P 500 ETF Trust (NYSE:SPY) and Invesco QQQ Trust ETF (NASDAQ:QQQ), which track the S&P 500 and Nasdaq-100, respectively, closed lower. SPY fell 0.46% to $762.40, while QQQ fell 0.29% to $716.31. Meanwhile, the Dow tracker, State Street SPDR Dow Jones Industrial Average ETF Trust (NYSE:DIA), also ended 0.75% lower at $524.07.
Disclaimer: This content was partially produced with the help of AI tools and was reviewed and published by Benzinga editors.
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