Market Mini | Gold: An Investment Ally Or Unreliable Asset

Posted By on Oct 18, 2013|2 comments


Introducing our first Market Mini – an analysis of market news relevant to you!

Gold bugs – those individuals that own gold for fear of inflation, currency value decline or Armageddon – should check historical relationships to this belief, suggests Campbell R. Harvey. Harvey is a J. Paul Sticht Professor in International Business Fuqua School of Business, Duke University, and author of “The Truth about Gold: Why It Should (or Should Not) Be Part of Your Asset Allocation Strategy,” (CFA Institute Conference Proceedings Quarterly, March 2013).

Harvey’s analysis concludes that gold does not provide a hedge for inflation, “surprise” inflation or act as a currency hedge. Yet, there is some indication that it does support hyperinflation.

While Harvey concludes little reason to hold gold, he does site two arguments in favor of gold. First, developing markets could increase the demand for gold, causing an increase in the price. Second, if all investors held gold in terms of its percentage of net worth in the world, price would increase with increased demand.

Here’s a look out how gold plays out in less favorable ways:

  • Gold as a hyperinflation investment – Beginning in 1980, Brazil saw inflation jump 250% in 20 years, but due to the increase in stock prices elsewhere, gold performed poorly, dropping nearly 70%. When Germany saw hyperinflation from 1920 to 1924, gold held its value rather than increase in value.
  • Gold as a safe haven – Comparing the performance of gold, short-term bonds and stock prices (S&P 500) from 1975 until 2012, gold and stocks fell in tandem 17% of the time while short-term bonds and stocks fell in tandem 0% of the time. Short-term bonds would consequently be the better investment if investors sought a safe haven.
  • Currency hedge – When prices of currencies decline, gold should increase in value. However, Harvey found that for every 10% decline in the value of currency, gold only increased 0.10% to 2.4%, which is not enough to offset the decline in currency value.
  • Price of gold to inflation – Since 1985, the price of gold relative to inflation has been about 3.2 times. Although this price has changed considerably from one year to the next, ranging from 1.5 to 8.5 times, the price returns to the average quite quickly; however, the lack of consistency from year-to-year makes gold a poor investment.

The best conclusion is to invest as gold prices begin to increase in value and sell when prices decline. In other words, apply a momentum-based approach to investing in gold.

2 Comments

  1. Look at how gold plays out has a grave and serious error in the first comment.

    Hyperinflation-Gold worked perfectly in BRAZIL when they had hyperinflation. If the individual in Brazil held their local currency they would have lost all their value. Those that owned gold saved their earnings and then some. How gold performed outside of Brazil has absolutely nothing to do with the hyperinflation story. I know I was doing business in Brazil at the time.

    Safe Haven-In this comment you neglect to mention the loss of value of the US Dollar. Of course you have to have the luck to hold the right bonds as well. The time period you suggest includes the beginning of an experiment in the first ever FIAT currencies. It lacks understanding and discovery that has taken the world close to 40 years to realize that this new experiment may be on the verge of faltering.

    Currency Hedge- When people talk about currency hedge it is not as a 1 for 1 ratio. It is in the case of a collapse. The people of Brazil, Venezuela, Argentina, Zimbabwe and many more understand what this means.

    Inflation- Inflation is a healthy norm in a growing market if it does not get away. Gold will always move as well and as you pointed out it has volatility. Which many investors enjoy the opportunity to trade in and out. But that is not its primary function.

    Gold is the only insurance plan in the case of failure of the financial system. Many people wish they owned some percentage of gold when the global economy began to crumble in 2006 and on.

    Paper money and negotiable instruments may become worthless but gold never will lose all its value.

    Invest when it is going up is like buying life insurance when you find out you have a grave illness. Of courses, what you really mean is to trade gold as a speculator not an investor for the future value.

    for more on my perspective please visit the below link.

    http://goldnews.bullionvault.com/gold-value-120320136

    Post a Reply
    • Thank you for the comment. It is good to have a story directly from someone who experienced hyperinflation in Brazil.

      Post a Reply

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