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Gold, is it safe from inflation?

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By Donna Rosato, senior writer

NEW YORK (Money Magazine) -- Q. I worry that the Fed pumping money into the economy could cause high inflation. Does investing in gold provide good protection? - Vikas Mehta, Herndon, Va.

A. Inflation (the rate rose just 0.1% in 2008) may very well make a comeback when the economy emerges from the current recession. And while gold has historically done well during times of extremely high inflation, it doesn't have a good track record of keeping up with moderate increases in consumer prices over the long haul.

Today the metal trades for nearly $900 an ounce, little more than the price it commanded in 1980; if it had kept pace with inflation, gold would be selling at more than $2,000 an ounce today. Moreover, gold prices are very volatile; in the past year, they went from a low of $650 to over $1,000, then fell halfway back again.

A safer way to hedge against inflation is to buy Treasury Inflation - Protected Securities (TIPS), says Manalapan, N.J. financial planner Andrew Lucas. As the consumer price index (CPI) rises, so do the interest payments and face value of your TIPS. You can invest in a fund that specializes in TIPS, such as the Vanguard Inflation - Protected Securities fund (VIPSX) or buy directly from the Treasury at treasurydirect.gov.  To top of page

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