Swedroe: Don’t Be Distracted By Gold’s Glitter

March 17, 2017

Perhaps fueled by the election of Donald Trump, once again we are hearing and reading stories about investors flocking to gold as both a safe haven and an inflation hedge. I’ve also noted an increase in the number of commercials promoting gold as a way to protect the value of your investments.

With that in mind, I thought it would be a good idea to return to my trusty videotape. I dug into my files to find the following forecasts, as well as some of the academic evidence on gold as an investment vehicle.

Pro-Gold Voices

In mid-July 2012, with gold trading at about $1,577, Merrill Lynch added its voice to the many that were predicting gold would reach $2,000 an ounce by the end of that year. Francisco Blanch, head of global commodities research at the investment bank, said: “We think that $2,000 an ounce is sort of the right number.”

At about the same time, in an interview with ETF.com, money manager Peter Schiff, who has attracted much media attention with his doomsday forecasts, offered up this prediction: “I’m looking for another leg up … it’s going a lot higher. It’s hard to tell where the next move is going to take it. But it’s going thousands of dollars higher than it is now.” When asked how high, he responded: “I think a minimum of $5,000. But it could go a lot higher than that.”

These kinds of predictions almost certainly helped drive investor interest in gold. In fact, a 2011 Gallup poll found that 34% of Americans thought gold was the best long-term investment, far more than those who chose real estate, stocks or bonds.

Of course, given investors’ tendency to buy high and sell low, after its poor performance since 2011, the 2016 Gallup poll found that gold was the favorite investment for just 17% of investors, now well behind the 35% figure for real estate and the 22% figure for stocks.

The question I’ll try to address today is: Do individuals choose to invest in gold for the right reasons? Well, one reason for investor interest in gold is the belief that it is a great hedge for inflation. Another is that it provides a hedge against currency risk. And a third is that gold can act as a haven of safety in bad times. Are these valid reasons?

The Evidence

In their June 2012 study, “The Golden Dilemma,” Claude Erb and Campbell Harvey examined these issues. In terms of being a currency hedge, they found the change in the real price of gold seems to be largely independent of the change in currency values. In other words, gold is not a good hedge of currency risk.

As for gold serving as a safe haven, meaning that it is stable during bear markets in stocks, Erb and Harvey found gold wasn’t quite the excellent hedge some might think. It turns out 17% of monthly stock returns fall into the category where gold is dropping at the same time stocks post negative returns. If gold acts as a true safe haven, then we would expect very few, if any, such observations. Still, 83% of the time on the right side isn’t a bad record.


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