Over the past year, the Federal Reserve has increased the M2 money supply by 25% in order to keep the economy afloat amid the COVID-19 pandemic.
When the money supply increases by 25%, the prices for goods, services, and assets need to increase proportionately in order to offset this currency devaluation. This is evident given the rapid spike in gold, real estate, lumber, and commodity prices.
Gold ETFs are designed to maintain their purchasing power as currencies are devalued. As the old saying goes, "you can't print gold." The Federal Reserve, though, has printed several trillion dollars through a process known as "quantitative easing."
Historically, the policy of the Federal Reserve has been to keep inflation in check. However, the new policy, according to Minneapolis Federal Reserve President Neel Kashkari during his Mar. 23 interview with 60 Minutes, is that:
"there is an infinite amount of cash in the Federal Reserve. We will do whatever we need to do to make sure that there's enough cash in the banking system."
The cost of this new policy effects savers who do not hedge their portfolio against inflation. This significant increase in inflation over the past year deteriorates the purchasing power of a portfolio held in US dollars.
Strategy Shares Gold Hedged Bond ETF (GLDB) is designed to hedge against the devaluation of the US dollar. The benefit of an ETF like GLDB versus older gold ETFs like GLD (NYSE:GLD) is that it pays a yield in addition to tracking the price of gold.
The fund is able to pay a meaningful yield because it invests in a portfolio of investment grade corporate bonds, then hedges the portfolio 100% to the price of gold. Most gold ETFs track the price of gold, but are essentially dead assets in the sense that they don't generate any earnings or pay a yield.
This GLDB Gold Hedged Bond ETF is a great alternative to traditional bond ETFs. The big problem with most investment grade corporate bond ETFs is that they pay a yield that does not exceed the current rate of inflation.
In effect, they earn what is a negative "real yield." Since GLDB is hedged against inflation through exposure to gold investors can benefit from the potential increase in the price of gold as the purchasing power of the dollar erodes.