5 Huge Myths About Gold

Molten Gold Smelting Pour Gold Bar

Photo: Kevork Djansezian/Getty Images

Is gold really a good gauge of inflation?No, says Claude Erb of theĀ Trust Company of the West andĀ Campbell Harvey of Duke University.

In a new working paper titled “The Golden Dilemma”, the pair take up the key drivers of gold and put them to the test.

According to the authors of the paper, some of the most common claims about the influencers of gold’s value are not true.

MYTH #1: Gold is a good hedge against inflation.

Inflation is a common reason cited to own gold. First, a very literal look. This graph shows spot gold prices against the U.S. consumer price index, a common measure of inflation. The red line is a regression that projects the implied price of gold were it determined by the CPI. It shows a mild positive relationship, but also that gold is volatile, does a bad job of tracking the CPI, and is wildly expensive compared to its utility as a hedge. The current price implied by the CPI is $780.

Source: The Golden Dilemma, p. 4

MYTH #1: Gold is a good hedge against inflation.

Here's gold over the consumer price index. If gold were a good inflation hedge, that blue line would go straight across.

Source: The Golden Dilemma, p. 5

MYTH #1: Gold is a good hedge against inflation.

Gold isn't much better as a long term inflation hedge.

Source: The Golden Dilemma, p. 6

MYTH #1: Gold is a good hedge against inflation.

Real prices tend to revert to the mean. Don't look for long term returns if you buy now.

Source: The Golden Dilemma, p. 7

MYTH #2: Gold is a good currency hedge.

Gold prices in these 8 currencies have moved nearly in tandem.

Source: The Golden Dilemma, p.15

MYTH #3: Gold is an alternative to low real returns.

Claude Erb and Campbell Harvey argue that this is a classic case of spurious correlation. One could argue that low yields cause high gold prices and vice versa. It is additionally possible that low yields and high gold prices are both driven by the some common external force, like fears of hyperinflation.

Source: The Golden Dilemma, p. 16

MYTH #4: Gold is a reliable safe haven in times of financial stress.

If gold were a reliable haven, quadrant three would be nearly empty, rather than containing 17% of observations.

Source: The Golden Dilemma, p. 18

MYTH #5: There is already a de-facto gold standard

Gold prices have little to do with either the U.S. monetary base, or its official holdings of gold. Official government holdings of gold have remained nearly constant in spite of the expansion of the Federal Reserve's balance sheet.

Source: The Golden Dilemma, p. 23

For much more on the subect

Don't miss: The Truth About Gold

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