Dear Mr. Berko:

I asked my broker about a good inflation hedge, and he pushed us to invest $25,000 in American Century Global Gold Fund. My wife and I are very concerned about inflation when we both retire in nine years at age 67. We have a $141,000 portfolio of income/growth stocks you recommended in the past, and we reinvest all the dividends as you recommended. Our broker says we should put 20 percent of our retirement investments and savings in this gold fund. I asked him about a U.S. guaranteed Treasury bond - I read about this somewhere but can't find the magazine - that, like gold, increases in value with inflation. The article said this bond is a good inflation hedge, but our broker says it's not backed by gold and won't do as good against inflation as a gold mutual fund. He recommends American Century Gold because it's a better investment than this government bond. He also believes the government could default on this bond and says, "gold doesn't default." What do you know about this bond? Do you think the gold mutual fund would be a better? Please tell as soon as you can as gold keeps going up in price.

CM: Cleveland, Ohio

Dear CM:

Because this saphead didn't mention the enormously less costly exchange-traded funds like iShares Gold (IAU-$17.32) or SPDR GOLD (GLD-$171.10) and blithely ignored your Treasury bond question, this suggests he's greedy, sneaky snot. Both of those ETFs are 100 percent backed by gold bullion. And that he immediately recommended American Century Global (ACGGX-$21), a mutual fund that charges a 5.75 percent commission, suggests he sells things for a brokerage that is a member of the New York financial Mafia. ACGGX doesn't own a speck of gold; rather it owns a menagerie of unpronounceable and ridiculously named gold mining stocks. Holy mackerel, Captain Melvin ... what's a guy gotta do to get honest and suitable advice from a brokster today?

The bonds you ask about are Treasury Inflation-Protected Securities (TIPS) and can be purchased directly from the U.S. Treasury. Go to TreasuryDirect.gov and follow the prompts ... if you can. TIPS are backed by the full faith and credit of the U.S. government, the principal is indexed twice a year to the Consumer Price Index and interest is paid every six months.

Assume one invested $10,000 in TIPS on Jan. 15, paying 1 percent interest. If annual inflation during the first six months of 2013 was 3 percent, then on July 15 the inflation-adjusted principal of the bond would increase to $10,150. In addition, the TIPS owner receives a semiannual interest payment of $50.75 ($10,150 times 1 percent divided by two) in cash. and if inflation grows by 4 percent during the second six months, the inflation-adjusted principal would increase by $200 to $10,350 on Jan. 15, 2014. Then the TIPS owner would receive a second semiannual interest payment of $51.75 ($10,350 times 1 percent divided by two) in cash. and if inflation grows by 6 percent in the following six months, the TIPS principal increases by $300 to $10,950. The principal value of TIPS will be increased twice each year until the bond matures. TIPS owners also receive interest checks twice each year on the increasing principal, until the bond matures. And because the interest and principal growth are subject to federal taxes, they're best owned in retirement accounts. TIPS can be bought in minimum amounts of $1,000 or multiples thereof and are held in electronic form at the Treasury. The TIPS market is huge, liquid, efficient and won't default.

And unlike the stock market or gold, both of which can decline in value, I can't recall a single year in which a TIP hasn't increased in value. I share your feelings about inflation and suggest you invest $10,000 of GLD, which may split 10 for 1 and the remaining $18,000 in TIPS with a 30-year maturity. Purchase GLD through a discount broker, and pay a commission of $9.00 vs. the $170 that brokster would charge. Then buy the TIPS from the Treasury.


Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at mjberko@yahoo.com. Visit Creators Syndicate website at www.creators.com.

© 2012 Creators Syndicate Inc.

Published: Mon, Nov 26, 2012


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