Gold vs. 0% I-Bonds

Here are some things to think about if you wish to hold either for 30 years.

Both investments have kept up with inflation over the long-term. Both investments are tax deferred. Neither pays dividends or interest. Both would be taxed on the inflationary gain. At 0%, I-Bonds and gold are therefore somewhat similar.

How could you win?

You can't win with I-Bonds. It isn't possible. At 0%, it should keep up with inflation but then you are taxed on the amount it keeps up.

You could win with gold. The reserve currency of the world (our US Dollar) could fall apart and investors could rush to gold in a serious way (pushing its price up in a serious way, even relative to inflation). I'm not saying it will. I'm simply saying that it could. We have been seeing that. Who knows how long it will continue?

How could you lose?

You will lose with I-Bonds. That's a given. The good news is that the pain is somewhat known up front. Over the ultra long-term, it would be like bleeding to death from a hangnail. In theory, you could do a lot worse (especially if you think you'll be in a low tax bracket in 30 years). It isn't the only thing losing out to inflation and taxes. Median wages are bleeding to death in a similar fashion.

Both investments could be confiscated. Gold has been confiscated in the past by governments. I-Bonds can be confiscated through a debt default (the government simply refuses to pay). I don't think either are likely, since inflation is the easiest form of confiscation. However, they are both possible.

Productivity miracles could see new ways to mine gold. There was a time when we used manual labor directly to extract it. Those days are gone. Just look at the long-term inflation adjusted price of silver.

Gold has tripled in price in the last few years. Clearly there is downside risk (history has not been kind to parabolic rises). If commodities are in a bubble (like dotcom stocks and housing before them), then the price of gold could drop even as inflation rises (think 1980s and 1990s).

I was thinking about this topic this morning. It just reminded me that we now seem to live in a least worst option environment. Everyone loves picking on the lousy investments one could make. That's so easy these days. What if they are all lousy though? The goal then would be simply to pick the least lousiest. One way they could all be lousy is if taxes are eventually raised and/or we actually try to spend within our means someday.

The 20-Year TIPS are paying 2% over inflation. Even they are not a sure thing. TIPS aren't tax deferred. If inflation hits 20% then taxes wouldn't feel like a slowly bleeding hangnail. It would feel like a sharp stab to the heart each and every year.

This isn't investment advice of course. I have no easy answers. If there was, I wouldn't be predicting the death of real yields (which might even be wrong long-term). I'd be pointing out high real yields as we grow even more prosperous. In my opinion, as the world rebalances billions are going to be disappointed that they did not gain nearly as much of our standard of living as they had hoped. Meanwhile, millions of us are going to be disappointed that we gained more of their standard of living than we had hoped. The "something for nothing" mirage is fading.