Another common portfolio question I hear: ‘What do you think of gold?’ Admittedly, this question isn’t quite as popular these days as it was a couple years ago. I wonder why that is…
Let’s look at the data, shall we?
Looks like a very impressive run, even through the financial crisis. I remember the deluge of ‘Cash for your Gold’ boutiques that opened during 2009-2011; sensible, seeing as the buyers of your ‘scrap’ gold benefitted from at least two tailwinds:
- Emotional sellers: the gold price became common knowledge, splashed across evening news and in everyday conversation. People wanted to take advantage of this opportunity. Shrewd buyers could fulfil the new supply by bidding low: those new to trading gold may be OK with selling at a 10% (or more) discount.
- Inventory appreciation: seeing as the gold price rose nearly continuously, these boutiques needn’t be in a hurry to sell their inventory. Unlike the Ma & Pa selling their fine wares, the boutique owners could await THEIR price.
Of course, all of this changed in 2012, and particularly 2013. With inventories suddenly depreciating at an increasing rate, boutiques turned into forced sellers. So that business becomes essentially untenable.
Alright, let’s review why people seem interested in owning gold:
- It’s pretty and rare. OK, no argument there. Has been for a long time.
- It’s value-dense. I can see why many folks in developing countries, particularly the unbanked, use gold as a savings vehicle. Definitely more portable than large quantities of bills.
- It’s a great inflation hedge. Hmm…really? Let’s look:
If Gold was a truly good inflation hedge, I would’ve hoped for a much smoother upward-sloping line in the chart. What this chart tells me is that some outlying observations really pull the slope up; the correlation here doesn’t seem too great. For most of the observations (CPI between ~75 and 200), gold’s price seems to be anti-correlated with inflation. Oh dear.
- It would be handy in a disaster scenario. Really? So we’re making assumptions about what would actually have value in times of crisis, the likes of which we haven’t seen since…well…a very long time. I mean, even during hyper-inflationary periods one can buy any real asset to hold value; gold isn’t special there. And if we’re saying that In a World where people no longer accept currency of any kind, gold will maintain value… I’m more on the ‘guns and ramen’ side of the fence.
In sum: no, I don’t hold gold in the portfolio. I’m not a fan. I do like gold’s volatility for trading strategies, however: it’s in the same bucket as the rest of my commodities exposure.
Extra Credit: for those interested in a great, and fortunately prescient, article on gold, see this Erb and Harvey (2012) paper.