We try to give gold bugs and gold sceptics equal due here at Business Insider.But a paper published last month by commodities expert Claude Erb and Duke/NBER Professor Campbell Harvey bring some of the problems with gold bulls’ theories into sharp relief.
Titled “The Golden Dilemma,” the pair scan 2,000 years of gold production and pit Warren Buffett’s contention that gold is a bubble against Ray Dalio’s argument that Treasury yields are a mirage.
They take aim at the following conceits:
- gold provides an inflation hedge
- gold serves as a currency hedge
- gold is an attractive alternative to assets with low real returns
- gold a safe haven in times of stress
- gold should be held because we are returning to a de facto world gold standard
- gold is “underowned”
Here we take you through their graphs debunking most of those…
They write: ''Gold as an inflation hedge' means that if, for instance, inflation rises by 10% per year for 100 years then the price of gold should also rise by roughly 10% per year over a century...However, in Exhibit 1, the price of gold swings widely around the CPI. The inflation derived price of gold and the actual price of gold have rarely been equal. Given the most recent value for the CPI index, this version of the 'gold as an inflation hedge argument suggests that the price of gold should currently be around $780 an ounce.'
They write: 'Since 1975 the real price of gold in these eight countries seems to have moved largely in tandem. The real price of gold reached a high level in 1980 amongst all eight countries. The real price of gold fell to a low level in each of the eight countries in the 1990s, and more recently the real price of gold has risen to very high levels in all eight countries...In fact, the change in the real price of gold seems to be largely independent of the change in currency values.'
They write: 'Exhibit 14 shows the joint distribution of U.S. stock and gold returns. How does gold hold up in Quadrant 3 (negative equity returns matched with negative gold returns)? The simple safe haven test states that there should be very few observations in Quadrant 3. In fact, 17% of the monthly stock and gold return observations fall in Quadrant 3. This suggests that gold may not be a reliable safe haven asset during periods of financial market stress.'
They write: '....incomes denominated in gold might be a very long-term hedge -- in that the real purchasing power of some wage rates are roughly preserved...Gold may very well be a long-run inflation hedge. However, the long-run may be longer than an investor's investment time horizon or life span.'
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