What Should Investors Know About Gold and Bonds During Inflation?

Should those interested in owning gold or bonds direct their focus to crypto instead? In this clip from "The 5" on Motley Fool Live, recorded on Jan. 18, Motley Fool contributors Trevor Jennewine, Jamie Louko, and Taylor Carmichael share their thoughts on owning gold and bonds and discuss why Bitcoin (BTC -0.16%) might just be a hedge against the dollar and against inflation.

Trevor Jennewine: Gold prices fell today, at least earlier in the day as U.S. treasury yields rose. Generally speaking, investors use gold as a hedge against inflation. That being said, precious metals are very sensitive to changes in interest rates. The falling price of gold alongside the rising treasury yields basically tells us that investors are anticipating rate hikes in 2022. Of course, we already knew that, but it's worth pointing out that there are those options for people looking to hedge against inflation. For reference, earlier today, the 10-year treasury note, the yield was at 1.8%, a level that has not been at since before the start of the pandemic. As that number continues to rise, the downside risk for richly valued stocks will continue to rise as well just because investors have that risk-free rate of return open to them and, as that number goes up, more investors are going to be incentivized to pull their money out of the stock market and put it into something in some safer assets. On the topic of inflation, do either of you guys currently own gold or have you ever considered investing in gold as a hedge against inflation? Then, on top of that, what are your thoughts on owning bonds right now with yields rising? Are you guys tempted to add bonds to your portfolio? Jamie, let's start with you.

Jamie Louko: I'm not a gold man. I'm not a bond man. It's just not something that interests me. I'm in the generation where bonds and gold are just about as boring as you can get, and that's never really been a serious consideration in any time that I've been alive. But, there is this one bond for those of you that are interested in investing in bonds, it's a bond called the Series I treasury bond. It tracks inflation and it adjusts its return every six months. Right now, it is giving a 7% rate of return because it's based on inflation and it changes every six months. In April, it will change based on the CPI index to a new return rate. But if you invest in the Series I bond, you can get 7% returns, which as Trevor said, is currently 1.8%. This is a very strong return compared to traditional bonds. If you're a bond person, you might want to look at it. But for me, no bonds, no gold, not my style.

Taylor Carmichael: Jamie, does that bond just track inflation? Is that the goal of the bond?

Louko: Yes, it adjusts itself every six months. There's a really good explanation on a podcast that I'm going to talk about later. It's called Animal Spirits. It basically readjusts itself every six months and tracks inflation. Right now, it just tracks the CPI. Right now I think it's at 7.1%.

Carmichael: Wow. I'm not a gold guy either. I'm definitely not a bond guy. I know that's a real conservative investment. I would urge people that are investing in gold or in bonds to take another look at crypto, if you have not. Do some research on crypto. There's a lot of great research out there, and I do think Bitcoin is virtual gold. I do think it's going to be a hedge. Ultimately, it's going to be a hedge against the dollar and against inflation. There are some wonderful things that are happening in the DeFi space, which is decentralized finance. You can get a pretty good return, staking your crypto and making money that way. Crypto is something for growth investors to look at, but I think value investors can find a lot of value in the crypto universe. Again, I'm not a gold guy. I'm not really a commodity person at all or a bond person. I've always traditionally been a stock guy, but I think the crypto revolution is really going to happen and it's a good idea to research it. There's some great opportunities in there for all investors.

Jennewine: Yeah, I fall into the same camp as both of you. I've never owned gold. I don't plan to invest in gold. To contextualize that, Warren Buffett once said that gold was a way of investing or going along on fear. He explained that if you own gold, you'll make money as people become more afraid. As they become less afraid, you'll lose money. I know we keep harping on this point. We are long-term investors so I'm not looking to hedge my portfolio against the current macroeconomic environment because I think over time it will resolve itself. Inflation will moderate. Interest rates have historically trended downward. They can't go lower than they will. Theoretically, they won't go much lower than zero since the Fed has said no negative interest rates. I wanted to share a chart real quick though. This is the 10-year treasury yield going back several decades. You can see that the yield was over 15% at one point back in the '80s. I would be much more excited about bonds if the yield were over 15% today. It looks like it's down around 1.78% right now. The Fed's goal is to keep inflation around 2%. At least right now, the bond's yield versus the actual inflation. The nominal yield is around 1.8%, but when you actually account for inflation, the real yield is negative. That being said, it's better than holding cash because at least you're making something, but you're still theoretically losing money just because of where inflation rates are right now. That's a long way of saying I'm not really interested in owning bonds or gold. I'm more of a stock guy and committed to that long-term buy-and-hold strategy. I think the variables that we're dealing with right now will moderate over time.