The False Promise of Gold

Michael Edesess |

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Gold has been an effective hedge against inflation over the very, very long term. But that’s about all it’s good for, according to an interesting and informative article, The Golden Dilemma, by Claude B. Erb, a former investment management company executive, and Campbell R. Harvey, a professor of finance at Duke University. The two examined six arguments that have been advanced by advocates for investing in gold. One of them is that gold is an inflation hedge. For shorter periods – from a year to a lifetime – no support whatsoever exists for the argument that gold is an effective hedge against inflation. On the contrary, gold ownership poses a much greater financial risk than inflation itself. Erb and Harvey also explored the validity of five other arguments for holding gold: it serves as a currency hedge; it is an attractive alternative to assets with low real returns; it is a safe haven in times of stress; one should hold gold because we are returning to a de facto world gold standard; and finally, gold is “under-owned.” In every case, the evidence advanced by Erb and Harvey strongly refutes the pro-gold argument. In fact, by the time Erb and Harvey are done, there remain only two possible investment reasons for direct ownership of gold: (1) as a risky “momentum” play; and (2) as a hedge against the remote risk of hyperinflation.