Nearly every major asset class has lost money this year, leaving investors scrambling to protect their wealth from rising prices. Traditional alternatives such as gold and property also have drawbacks, writes Edward Chancellor
For more than a quarter of a century, investors benefited from low and stable inflation. Price stability meant more predictable corporate earnings. Lower interest rates fed through to higher equity and bond valuations.
But when inflation takes off, stocks and bonds become positively correlated, rising and falling together. In the first half of the 1970s, a classic 60-40 portfolio in UK stocks and bonds lost more than half of its value in real terms. In the first six months of this year, the same portfolio declined 16% in nominal terms.
This year, however, the barbarous relic has fallen around 10% in dollar terms. Gold bugs are not too dismayed: the recent poor performance is largely a consequence of the steep rise of the greenback. Gold has delivered positive returns when measured in euros, yen and British pounds.Still, many investors won’t touch gold because it generates no income and is difficult to value.
“Each attempted inflation hedge has its particular attractions, risks, and shortcomings,” wrote the journalist Henry Hazlitt in 1978. That’s true of real estate, gold and commodities. But inflation-protected bonds, whose principal and interest are linked to an index of prices, weren’t around at the time. The UK government introduced index-linked gilts in 1981, while the United States first offered Treasury Inflation Protected securities in 1997.
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