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


  1. Gold has been and is the people’s money of choice. Governments, particularly the U.S. gov. have attempted to obliterate choice on behalf of their own fiat currencies. They’ve used such tactics as confiscation, gold-market manipulation and legal tender laws to discourage gold’s monetary use. The effort to suppress gold’s role as money has been effective in the short run, but in the long term choice will prevail. The current price of gold is a reflection of the fact that more and more people worldwide, having been deceived, deprived and cheated by their government’s inflation of fiat currencies, are waking up and have turned (or returned) to using gold in its ancient role as a reliable store of value, and more and more as a medium of exchange. Its value as compared to fiat currencies should continue to increase.

  2. Again, who cares about CPI? What is of concern to people holding gold is currency debasement, not whether some straitjacket of goods has risen or fallen. /yawn

    Especially since prices should be falling, and since money is being channeled into asset markets.

  3. Paper gold is an investment. Physical gold is real wealth. One could think of it as an investment, but to me it makes more sense to think of it as insurance and/or an inter-generational and cross-cultural store of value. And it’s a hell of a lot easier to carry around and split into pieces than a four-bedroom antique colonial on 7 acres.

  4. Their graphs, in the link, stupidly obviously fail to understand specific facts about reality. They just blindly correlate statistical data with each other here and there, like every student can do as math homework. They fail to be, in any sense, relevant to any kind of economic analysis. They express no understanding at all. They use no information. They just mechanically automatically correlate statistics they found in some archive. They do not analyze economics in any way.

    Per definition, any price which has risen is negatively correlated over time with its previous level, but they produce a graph to show this as if it could be in any way a relevant economics argument about gold. And what if the 1980 peak in gold prices actually really corresponded to a, say, 50% probability of a new kind of Bretton-Woods once again connecting the dollar to gold? Then gold price was not an over estimation. And so on. A laugh per graph, how do they correlate that piece of statistics? Economics is the science about the unseen, that which people have chosen not to do. Statistics is its opposite. These guys study statistics, history, not economics.

  5. I do not have access to the paper but it appears that the analysis includes data before Richard Nixon broke the link between gold and the dollar. What makes this interesting is that usually such papers include only the period after the link was broken yet the prior period is usually important to the analysis. In this case the data prior to the breaking the gold-dollar link does destort the data.

    I have not done the analysis but from what I know of the price of gold relative to the CPI since 1970s I would be surprised if gold was not an outstanding hedge against increases in the CPI.

    As I said I have not read the paper but from what I have read the assumptions on which the paper is based seem questionable.

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