Given the recent volatility in gold, it’s a good time to
raise the question: What is gold good for?
Why? Because most have often wondered about the
answer. The answer may not be absolutely nothing,
as in the Edwin Starr song, but it is a lot less than you
The yellow metal has reacted meaningfully
during only two incidents in the 44 years since Nixon
closed the gold window on August 15, 1971: the
1970s inflation/oil crisis and the 2000s rise of
China/financial crisis/debt deflation.
Gold as a tactical strategy
At best, gold is a useful tactical asset in situations
where returns on safe assets turn negative. Those
incidents have been relatively rare. Gold should not
be a perennial in your portfolio if you live in a place
with developed financial markets and the rule of law.
It earns no income and serves little purpose.
Gold is touted as many things, particularly as a hedge
for inflation and as a safe asset in fraught times. It is
Gold has an inconsistent relationship with inflation.
The two episodes in which gold has correlated well
with changes in the CPI are stark opposites. It
probably gained its reputation as an inflation hedge
because it correlated highly with the inflation of the
1970s. Since the financial crisis, it has also correlated
well with inflation, which has been very low. Not
anyone’s idea of an inflation hedge. Between the
malaise of the 1970s and the global financial crisis,
gold’s correlation with inflation was volatile and largely
A history of gold prices
As for gold’s crisis hedging quality, take a look at its
chart from 1960 to today.
There are really just two spikes in the gold price. The
first occurred at the end of the 1970s. It followed the
great inflation and two oil shocks and dissipated in the
wake of Volcker’s tightening of monetary policy.
Spike two came with the rise of China and the run up
of commodity prices in its wake. It continued into the financial crisis. So, gold could have provided a
counterbalance to your portfolio during two ugly
incidents in financial markets. What about the myriad of other crises we have been through over the past four
What did gold do during the savings and loan crisis in
the late 80s, the ERM crisis of the early 90s, the
Tequila crisis of the mid-90s, the Asia crisis of the late
90s, the tech wreck of the early 2000s? The answer
is precisely nothing.
Safe assets and negative real returns
Gold has done well when safe assets, like US
treasuries, offer negative real returns. It is only at
such times that an asset which earns nothing and
may cost you (or the ETF provider) something to store
is worth holding.
We are beyond the Fed starting to move away from
its zero interest rate policy – that started a while ago.
Remember, the all-time low was 0.25 percent, which
is effectively zero. The Fed lowered it to this level on
December 17, 2008, which was the 10th rate cut in
about a year. And they didn’t raise rates again until
Real rates are likely to be higher across the curve
over the next few years. That has turned gold into just
another commodity; it will remain that way for many
years. Someday, when the imbalances have added
up and policy makers misjudge events, gold will once
again have a moment in the sun.
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