TIPS and gold are closely correlated and serve as deep out of the money options on catastrophic changes in the price level, but TIPs can protect against deflation because they will pay-off at par upon maturity. This is not the case for some inflation protected securities.
With less recent fear of inflation, both gold and TIPS have declined, but it is interesting that TIPS at the latest Treasury auction still posted a -.089% yield. The close correlation between gold and TIPS may continue if there is greater talk of deflation or inflation. Similarly, if real rates start to increase, there will be a sell-off of both gold and TIPS. These markets should still be considered close substitutes.
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