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Are 'inflation-protected' bonds really better than gold?

Section: Daily Dispatches

10:30p ET Tuesday, September 25, 2007

Dear Friend of GATA and Gold:

Many of you already have realized that when one begins looking at the financial world through the perspective of gold, one sees things that cannot be acknowledged by the financial establishment, for gold is the secret knowledge of the financial universe.

Even so, the disinformation about gold and the propaganda in support of keeping the world hostage to the increasingly hysterical fiat currency system can be mind-blowing, no more so than it was today with some investment advice posted at

It was written by Gregg Greenberg, who is, predictably enough, a former producer for CNBC, and it advises purchase of Treasury Inflation-Protected Securities as superior to gold for guarding against currency debasement.

The average TIPS fund, Greenberg writes, is up nearly 5 percent this year, while gold suffers "price swings."

But so much crucial information is completely omitted from Greenberg's report:

1) The unreliability of the U.S. Consumer Price Index, by which the TIPS interest rate is determined. Even establishment analysts have begun to acknowledge that the CPI has been politicized and grossly understates inflation.

2) The 5-percent rate of return for the average TIPS fund this year is nothing compared to the rate of return for gold. So far this year gold is up 14 percent. For the last 12 months gold is up 23 percent. For the last five years gold is up 125 percent.

3) The 15 percent decline in the international value of the dollar since late 2005, which erases TIPS gains.

4) The outperformance by more than 100 percent of the HUI gold mining share index over the Dow Jones Industrial Average over the last five years.

Greenberg quotes a TIPS fund manager as saying, "If it's inflation you are worried about, then TIPS are what you want."

In fact, if you heed here, you could just as well dump your money in the street.

We can't wait for's incisive interview with the salesman for collateralized debt obligation bonds. In the meantime, Greenberg's celebration of TIPS is below.

CHRIS POWELL, Secretary/Treasurer
Gold Anti-Trust Action Committee Inc.

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An Inflation Play As Good As -- Or Better Than -- Gold

By Gregg Greenberg
Tuesday, September 25, 2007

TIPS are not as good as gold when it comes to fighting inflation. In many respects, they are even better.

Treasury Inflation Protected Securities, or TIPS, are designed to protect investors from the erosion of purchasing power that rising inflation can cause. In an inflationary environment, TIPS, which pay a semiannual coupon, tend to outperform most traditional fixed-income investments, because their par value is adjusted to account for changes in the consumer price index.

For instance, if the CPI rises by 0.2%, the value of the TIPS bond would also climb by 0.2%. If the CPI were to decline, the bond's value would fall very little, because the government guarantees the original investment.

Gold, on the other hand, does not pay a dividend. Until it is sold, gold bullion just languishes in a safety deposit box, while the metal succumbs to the market's price swings. And despite its recent run up through the $720 mark, gold is not the all-encompassing, "pure play" answer to inflation many investors think it is.

"Gold is influenced by a lot of other factors and drivers, like industrial and consumer use," says Ken Volpert, portfolio manager of the $10.6 billion Vanguard Inflation-Protected Securities fund, in a recent TV interview. "If it's inflation you are worried about, then TIPS are what you want."

And a lot of people have been wanting TIPS lately. The average TIPS fund is up 4.9% year-to-date, according to Morningstar, making it the top performer in the fixed-income category.

Volpert, whose fund is up 5.7% year to date, says TIPS are "fairly priced right now." He points out that there are $430 billion in TIPS currently in a market that has been growing annually by about 10%, so "supply is good, but not overwhelming." Meanwhile, on the demand side, overall performance has improved so "we have been seeing a nice bid underlying the market."

Another Federal Reserve rate cut like the last one, however, would really boost TIPS, says Volpert.

"I'd be concerned if the Fed eases a lot more, because the Fed was talking tough about inflation and then surprised the market with a deeper-than-expected rate cut," says Volpert. "That justifies long-term concerns about inflation."

Those concerns are evident in the break-even rate, which in bond parlance refers to the difference between the yield on conventional Treasury securities and that of comparable TIPS. The current break-even rate on 10-year TIPS is 2.3%, which has climbed since this summer, but is still below April's 2.5% reading, and well below last year's peak of almost 2.8%.

More troubling for inflation watchers, however, is the five-year forward rate, which measures inflation over the long term. That rate is now at 2.6%, up from 2.53% before the Fed's dramatic rate cut, as well as some relatively benign August CPI data.

"The CPI is backward looking, but the market looks forward," says Volpert. "The Fed rate cut was dovish to the point where many people are wondering if more easing is on the way."

And perhaps more interest in TIPS.

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