Investment Manager Research | Real Assets
Gold: Savior or Fraud
October 30, 2019
- Despite the common perception gold provides protection against high and increasing inflation, gold actually has performed best in deflationary environments.
- Although evidence suggests gold offers protection during periods of stock market distress, historically it loses its luster during severe market corrections.
- On the other hand, gold and expected real interest rates have a statistically strong relationship; but, historically, market participants have had a poor track record predicting real rates.
- While there will be periods when gold provides attractive returns, the inconsistency and unpredictability of these periods dissuade us from including gold in our capital market allocations.
Upon rising nearly 20 percent over the past 12 months, gold prices are making headlines and sparking intrigue among investors. While investors may be tempted to associate increased equity volatility (as measured by the VIX Index) to gold’s recent price appreciation, we are reminded of the popular quip “It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” In this paper, we examine what role gold should play, if any, in a portfolio.
A Brief History
Gold’s role in commerce is a history of monetary systems. During the Roman Empire, under a gold-backed monetary regime, the Romans used gold and silver coins to facilitate trade, support capital projects and fund military expeditions. Eventually these costs accumulated relative to the finite supply of silver and gold entering the empire. In response, Roman officials devalued their currency by decreasing the purity of the coins to increase the supply in the market. It was effective to a point. Eventually the diminished coin quality led to hyperinflation, contributing to the demise of the Roman Empire.
There are numerous other cases of monetary regimes vacillating from gold- to fiat-based systems. Throughout regime changes, a common theme emerged: the balance between monetary flexibility and trust in a monetary system.
Fast forward to the immediate aftermath of World War II, allied nation leaders tied foreign exchange rates to the U.S. dollar and pegged the U.S. to gold at $35 per ounce. That monetary arrangement, The Bretton Woods System, lasted until 1971 when U.S. President Richard Nixon closed the gold window. Since then, global policymakers have generally favored the floating rate fiat currency arrangement in place today…
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