There's a 'better hedge' against rising inflation — and it's not gold, says fund manager

Published Thu, Jul 15 20211:34 AM EDTUpdated Thu, Jul 15 20211:41 AM EDT

Gold has become less attractive as a hedge against rising inflation as the U.S. Federal Reserve shows signs of becoming less tolerant of ultra-low interest rates, said a portfolio manager. There's a "better hedge" than gold against rising consumer prices, said Mary Nicola, global multi-asset portfolio manager at PineBridge Investments. "Now our main inflation hedge is TIPS," she said during CNBC Pro Talks with Tanvir Gill on Wednesday. TIPS refers to Treasury inflation-protected securities , a type of U.S. government bond that's linked to an inflation measure to protect investors from the decline in purchasing power of their money. Investors of TIPS receive regular interest payments until the security matures. But the principal paid to investors upon maturity is either the original amount or an amount adjusted for inflation — whichever is greater. Nicola said TIPS would do well when inflation is persistent but temporary. "We think inflation will be persistent but transitory, so it's not likely to stick. But obviously because of the supply-chain bottlenecks you're going to get a few months, and probably even longer than expected months, of high inflation print," she said. Consumer prices have been escalating in the U.S. due to a few factors. They include disruptions to supply chains , extraordinarily high demand as the pandemic eases and comparisons to a year ago, when the economy was struggling to reopen in the early months of the crisis. The U.S. consumer price index surged 5.4% in June from a year earlier — the largest increase since August 2008. Core CPI, which strips out volatile food and energy prices, rose 4.5% year-on-year in June — the biggest jump since September 1991. Impact on gold The jump in prices has led the Fed to raise its expectations for inflation this year and brought forward the time frame on when the central bank will next raise interest rates. The shift in Fed rhetoric means that money supply may not grow as much as before, said Nicola. She added that such an environment would hit gold, which typically does well when real interest rates are negative. Real rates are negative when inflation is greater than nominal interest rates. "Since the Fed rhetoric has shifted and it has shown that it's less tolerable of negative real rates, money supply won't be as ample as it was before or growing as fast as it was, this should have an impact on gold," the portfolio manager said. "So as a result, we've reduced it quite significantly." — CNBC's Jeff Cox contributed to this report.

Gold bullion bars are pictured after being inspected and polished at the ABC Refinery in Sydney on August 5, 2020.

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Gold has become less attractive as a hedge against rising inflation as the U.S. Federal Reserve shows signs of becoming less tolerant of ultra-low interest rates, said a portfolio manager.