Gold vs Treasuries: Which is a better hedge against a market crash?

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The current economic scenario is difficult and uncertain. Even though the US stocks are hitting new all-time highs, investors face an environment where the bond yield curves are flat or inverted. Amid the US-China trade war, slow economic growth, and the Middle-East turmoil, investors are rushing to gold or Treasuries to protect their wealth from inflation, impending recession, and other risks. In this gold vs Treasuries comparison, let’s check out which of the two is a better hedge against inflation.

Over the last few years, central banks across the globe have embraced an easy monetary policy, which reduces returns from bonds. Both gold and Treasury bills have proven effective for portfolio diversification. They are both safe haven investments, though Treasuries also pay a yield. Here we take a look at the pros and cons of both asset classes.

Gold: The crisis commodity

Gold is a “crisis commodity.” When investors sense economic or geopolitical tensions, they turn to gold to protect their wealth from inflation and other risks. The yellow metal has historically appreciated when investor confidence in the economy and government is weak. It jumped as much as 25% during the 2008-09 financial crisis.

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The shiny metal is a formidable defense against the falling value of paper currency. You can invest in gold by purchasing jewelry, coins, bars, or gold ETFs. The physical gold makes a little less sense because it carries a markup. There is also the risk of theft if you store it at home. In contrast, ETFs have a lower cost and lower risk than physical gold.

Investors have used gold as a hedge against inflation for a long time. The yellow metal rallies when the markets expect inflation to rise. The United States is printing money at record pace to service its mounting debt, which could fuel inflation. Wars and geopolitical tensions also prompt investors to seek refuge in the yellow metal.

Gold doesn’t yield anything vs treasuries which pay some interest. A 10g gold coin will still be a 10g gold coin even after years or decades. Its value depends on the sentiments of people hoarding it. When the economy is doing well, investors cut their gold holdings to invest in equity markets, which reduces its price.

The yellow metal is not dependent on any government’s promise to pay you. Gold is perceived as an alternative currency. If our existing financial system collapses, gold could be used to facilitate trade. That’s why even central banks hoard gold in their official reserves. It’s an international currency that has been around for thousands of years.


Some investors prefer Treasuries over gold because it also yields certain return on the investment. It provides you a reliable income. Just like gold, bonds are an integral part of a risk-averse portfolio. The recent yield-curve inversion (when yields on short-term bonds are higher than yields on long-term bonds) has sparked speculations that an economic slowdown could be imminent.

Bond prices and bond yields are inversely related. When investors actively buy bonds, the yields go down. It’s an indication that the economy is not doing well. If the economy were thriving, investors would be selling bonds and investing in equities. In the long-run, equities deliver much better returns vs both treasuries and gold.

Currently, the 10-year Treasury note yield is around 1.6%, and it could go down further if there is an economic downturn or recession in the near future. In contrast, the inflation rate hovers at around 2.1%. Central banks in the US and other leading economies are lowering the rates. During the next recession, the Federal Reserve could be forced to bring down the rates to near-zero.

If you want to check the real Treasury yields, go to this page on the US Department of Treasury’s website. You can see that the real yield (nominal yield – inflation) is negative for 5-year, 7-year, and 10-year bonds. It’s 0.21% for 20-year and 0.36% for 30-year bonds.

Gold vs Treasuries: Hedging against risk

If you invest in gold, the only way it can beat inflation is because of its sentimental value. Jewelry accounts for nearly half of the gold demand worldwide. It also has applications in dentistry, electronics, and aerospace industries. But its price rises or falls depending on investors’ perception of the economic and geopolitical conditions.

In contrast, Treasuries are fully backed by the US government. They also give you a steady yield. However, Treasury yields have declined steadily over the last decade, making it a less attractive proposition than before. Falling Treasury yields make gold a more attractive investment vs Treasuries.

If you look at the trend around the world, bond yields are declining. According to Bank of America, as much of $16 trillion worth of global bonds have a negative yield. It means investors have to pay money to hold those bonds. After adjusting for inflation, the bond yields in most developed economies is either negative or close to zero.

Gold vs treasuries: Lower rates coming?

Treasuries are not an attractive hedge against inflation. If you are purchasing Treasury notes, you should not expect any real return. We cannot predict the future, but if there is an economic crisis, the Treasury yields could sink further. President Donald Trump is already pitching for “ZERO, or less” interest rates.

Unlike Treasuries, gold fluctuates in price and doesn’t yield anything. Its price could fall soon after you buy it, and it may take a long time before your investment turns profitable. Unless you are investing in gold ETFs, there is also the issue of safely storing the physical gold.

However, over the long run, gold appears to be a better hedge vs treasuries for inflation for a number of reasons. It’s more negatively correlated to equities than the Treasury bills. If you have an equity-oriented portfolio, the yellow metal could minimize your losses when the stock markets crash. Gold has delivered strong returns during unstable economic conditions.

Several studies have shown that the shiny metal’s value increases rapidly when the inflation goes up. In contrast, the real returns on Treasury bills decline in times of rising inflation.

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