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NBER's Golden Dilemma


NBER has just published a paper, "The Golden Dilemma." by Claude B. Erb and Campbell R. Harvey. The paper examines several issues regarding the use of gold in financial portfolios. It finds that many of the arguments for owning gold are questionable. For example they find that gold is not a good inflation hedge in the short run (several years) because it does not correlate well with the Consumer Price Index. However, they find that it is good to have during hyperinflation.

NBER Working Paper No. 18706



While gold objects have existed for thousands of years, gold’s role in diversified portfolios is not well understood. We critically examine popular stories such as ‘gold is an inflation hedge’. We show that gold may be an effective hedge if the investment horizon is measured in centuries. Over practical investment horizons, gold is an unreliable inflation hedge. We also explore valuation. The real price of gold is currently high compared to history. In the past, when the real price of gold was above average, subsequent real gold returns have been below average consistent with mean reversion. On the demand side, we focus on the official gold holdings of many countries. If prominent emerging markets increase their gold holdings to average per capita or per GDP holdings of developed countries, the real price of gold may rise even further from today’s elevated levels. In the end, investors face a golden dilemma: 1) embrace a view that ‘those who cannot remember the past are condemned to repeat it’ and the purchasing power of gold is likely to revert to its mean or 2) embrace a view that the emergence of new markets represent a structural change and ‘this time is different’.

Charts and conclusions here

Mark Thornton is a Senior Fellow at the Mises Institute and the book review editor of the Quarterly Journal of Austrian Economics. He has authored seven books and is a frequent guest on national radio shows.

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