The Golden Dilemma
Claude B. Erb
Los Angeles, CA 90272
Campbell R. Harvey
Duke University, Durham, NC 27708
National Bureau of Economic Rearch, Cambridge, MA 02138
Gold objects have existed for thousands of years but gold has only been an actively traded object since 1975. Gold has often been described as an inflation hedge. If gold is an inflation hedge then on average its real return should be zero. Yet over 1, 5, 10, 15 and 20 year investment horizons the variation in the nominal and real returns of gold has not been driven by realized inflation. The real price of gold is currently high compared to history. In the past, when the real price of gold was above average, subquent real gold returns have been below average. As a result investors in gold face a daunting dilemma: 1) ek inflation protection by paying a high real gold price that almost guarantees a decline in future purchasing power or 2) avoid gold and run the risk of a decline in future purchasing po
wer if inflation surges. Given this situation is it time to explore “this time is different” rationalizations? We show that new mined supply is surprisingly unresponsive to prices.
In addition,authoritative estimates suggest that about three quarters of the achievable world supply of gold has already been mined. On the demand side, we focus on the official gold holdings of many countries. If prominent emerging markets increa their gold holdings to average per capita or per GDP holdings of developed countries, the real price of gold may ri even further from today’s elevated levels.
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Version: June 7, 2012. We appreciate the comments of Tapio Pekkala and the minar participants at the Rusll Academic Advisory Board.
Disclosure statement: e faculty.fuqua.duke.edu/~charvey/gold disclosure.htm.
Introduction
abnormalIn the world market portfolio, the global equity and fixed income markets have a combined value of about $90 trillion. Institutional and individual investors own most of the outstanding supply of stocks
and bonds. At current prices, the world stock of gold is worth about $9 trillion. Yet investors own only about 20% of the outstanding supply of gold. A mov e by investors to “market weight” gold holdings would probably nd the price of gold much higher. Should investors target a gold “market weight”? Could they achieve a gold “market weight” even if they wanted to?
The goal of our paper is to try to better understand how we should treat gold in ast allocation. We start by examining a number of popular stories that are ud to justify some allocation to gold, such as inflation hedging, currency hedging, and disaster protection. We then examine basic supply and demand factors. Remarkably, the new supply of gold that comes to the market each year hasn’t substantially incread over the past decade even though the price of gold has rin fivefold. We also look at the distribution of gold ownership in developed countries and emerging market countries and estimate the impact on gold demand if key emerging market countries follow the same patterns of central bank gold ownership in important developed countries.
Gold has had an amazing recent run. From December 1999 to March 2012 the U.S. dollar price of gold ro more than 15.4% per annum, the U.S. Consumer Price Index incread by 2.5% per annum, while U.S.stock and bond markets registered annual gains of 1.5% and 6.4%, respectively. Indeed, Saad (2012) notes a recent Gallup poll found that about 30% of respondents considered gol
d to be the best long-term investment, making gold a more popular investment than real estate, stocks, and bonds.
Though some might u historical returns to establish long-run forward-looking expected returns, it is implausible that the expected long-run real rate of return on gold is 13% per year (15.4% nominal minus an assumed 2.5% annual inflation). Yet, it is esntial to have some n of gold’s expected return for ast allocation. Current views are sharply divergent. On one side is Buffett (2012) who compares the current value of gold to three famous bubbles: Tulips, dotcom, and the recent housing bust. Buffett writes:
What motivates most gold purchars is their belief that the ranks of the
fearful will grow. During the past decade that belief has proved correct.
Beyond that, the rising price has on its own generated additional buying
enthusiasm, attracting purchars who e the ri as validating an
investment thesis. As “bandwagon” investors join any party, they create
their own truth –for a while.”
In contrast, Dalio1 argues that Treasury bills are no longer a safe ast and that there will be an ugly contest to depreciate the three main currencies (dollar, Yen and Euro) as countries print money to pay off debt. Dalio notes:
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Gold is a very underowned ast, even though gold has become muchown goal
more popular. If you ask any central bank, any sovereign wealth fund,
any individual what percentage of their portfolio is in gold in relationship
1 See Ward (2011).
to financial asts, you'll find it to be a very small percentage. It's an
imprudently small percentage, particularly at a time when we're losing a
currency regime.怎样才能当瑜伽教练
It is not surprising that there is so much disagreement about gold’s future. This disagreement reflects the fact that at least six somewhat different arguments have been advanced for owning gold2:
∙gold provides an inflation hedge
∙gold rves as a currency hedge
∙gold is an attractive alternative to asts with low real returns
∙gold a safe haven in times of stress
∙gold should be held becau we are returning to a de facto world gold standard
∙gold is “underowned”办公室政治
The debate over the prospects for gold rembles in some n the parable of the six blind men and the elephant.3 Different perspectives, different models, lead to different insights. Depending upon which rationale, or combination of rationales, one embraces, gold is either very expensive or attractive. The debate over the value of gold is also an example of a Keynesian beauty contest.4 The Keynesian beauty contest framework suggests that the price of gold is not determined by what you think gold is worth. What matters is, for example, what others think others think others think others think gold is worth.
While the possible value of all the gold ever mined is about $9 trillion,5 only a small amount of gold actually trades in financial markets. We show that the investment demand for gold is characterized by a positive price elasticity. This is one way of referring to momentum investing. As a result, even though historical measures of “value” might suggest gold is very expensive, it is possible that the actions of a relatively small number of marginal, momentum, buyers of gold could drive the real and nominal price much higher (especially if the marginal buyers are not focud on “valuation”).
1.Gold as an inflation hedge
Probably one of the most widely held beliefs about gold is that it is an inflation hedge. Jastram (1977) pointed out that historically gold has been a poor hedge of inflation in the short run though it has been a good hedge of inflation in the long run. For Jastram, the short run was the next few years and the long run was perhaps a century. Harmston (1998) built on Jastrom’s rearch, finding that in the lo ng run the prices of some goods, such as bread, em to command a constant price when denominated in ounces
2 See World Gold Council (2010).
3 See Saxe (1872).
4 See Keynes (1936).
network5 The World Gold Council estimated that at year-end 2011 there were about 171,300 metric tons of gold above ground. This is a widely referenced estimate of the cumulative amount of gold that has been mined over time. The fact that this estimate is widely referenced does not mean that it is accurate. Given 32,150 troy ounces per metric ton and a price of $1,650 per ounces yields a value of about $9 trillion.
of gold. 6 “Gold as an inflation hedge” means that if, for instance, inflation ris by 10% per year for 100 years then the price of gold should als o ri by roughly 10% per year over a century. The “gold as an inflation hedge” argument says that inflation is a fundamental driver of the price of gold .7
Exhibit 1 illustrates one literal version of the “gold as an inflation hedge” argument. Our initial sample starts in 1975 becau for most of the history of the U.S., the price of gold was fixed by the government.8 Exhibit 1 shows the month-end value of the nearby gold futures contract versus the monthly reading for the U.S. Consumer Price Index (CPI), over the period January 1975 to March 2012. The red regression line shows that on average the higher the level of the CPI the higher the price of gold. This line roughly portrays the implied price of gold -- if gold was driven by CPI. Howev
er, in Exhibit 1, the price of gold swings widely around the CPI. The inflation derived price of gold and the actual price of gold have rarely been equal. Given the most recent value for the CPI index, this version of the “gold as an inflation hedge” argument suggests th at the price of gold should currently be around $780 an ounce. Exhibit 1. Gold as an Inflation Hedge
6Harmston mentions that in 562 B.C., during the reign of the Babylonian king Nebuchadnezzar, an ounce of gold purchad 350 loaves of bread. At the recent price of $1,600 an ounce, an ounce of gold could buy 350 loaves of bread priced at $4.57 a loaf .
7 See Greer (1997). 8 U.S. President Nixon ended the gold standard for the U.S. in August 1971. U.S. citizens had few legal
opportunities to own gold, outside of jewelry, between 1933 and the end of 1974. Modern exchange traded gold futures contracts began in the U.S. in January 1975. The first London gold “fixing” occurred in 1919
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(www.lbma.uk/pages/index.cfm?page_id=15&title=market_history ). Five gold bullion dealers
collectively decided what the price of gold should be on a given day. The London gold fixing was suspended in 1939 and it was reinstituted in 1954.
$0
$200
$400
$600
$800$1,000$1,200$1,400$1,600
$1,800
$2,000
050100150
200250S p o t G o l d P r i c e
(J a n u a r y 1975 t o M a r c h 2012)U.S. Consumer Price Index
(January 1975 to March 2012)
Another way to asss how effective gold has been as an inflation hedge is to examine the historical fluctuations in the real (inflation adjusted) price of gold. If gold were a perfect short-term hedge of inflation then the real price of gold should be a constant and exhibit no variability. If gold were merely a “good”, but not perfect, hedge of short term inflation then the volatility of the real price o f gold should be less than the volatility of the price of gold. The real price of gold might only periodically equal the average real price of gold. If gold is an inflation hedge, in the long run, gold should have a
摘要翻译
rate of return similar to inflation. Fur thermore, if gold is just a “good” inflation hedge and not a perfect inflation hedge then deviations between the real price of gold and the expected, average, real price of gold should be corrected over time. Investing when the real price of gold is high, expensive, should act as a drag on future real returns and investing when the real price of gold is low, inexpensive, should enhance prospective real returns.
Exhibit 2 shows one way to think about fluctuations in the real price of gold from a U.S. perspective (later we deal with an international perspective). In January 1975, the month-end price of the nearby gold futures contract was $175 an ounce. The month-end January 1975 index value of the U.S. CPI index was 52.3. The ratio of the price of gold relative to the CPI index was 3.35. Since the inception of gold futures trading this real price ratio has averaged about 3.2, reached a low value of 1.46 in March of 2001 and a high value of 8.73 in January 1980. Using this measure, the month-end March 2012 real price of gold was recently 7.3. Since the start of gold futures trading the only other time the real price of gold has been roughly as high as it is today was in 1980. Following the real price high in 1980, the real price of gold, as well as the nominal price of gold, fell significantly.
Exhibit 2. The Real Price of Gold since the Advent of U.S. Futures Trading
0.01.0
八下英语单词表2.0
3.04.0
5.0
6.0
7.0
8.0
9.010.0Current real price=7.33
Exhibit 2 illustrates that the real price of gold has been quite volatile. In fact, the volatility of the real price of gold has been basically the same as the volatility of the price of gold and the real price of gold tended to mean revert over a time period of about ten years. The variability of the real price of gold suggests that gold has been a poor short-term inflation hedge.
Investors really care about unexpected inflation. Exhibit 3 details the ability of gold to hedge against unexpected inflation (measured by the change in the annual inflation rate).
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Exhibit 3: Gold and Unexpected Inflation, 1975-2011
1980
There is effectively no correlation here. Any obrved positive relationship is driven by a single year, 1980.
What about the ability of gold to hedge longer-term inflation?
Exhibit 4 shows rolling monthly obrvations of trailing ten-year rates of inflation, as well as both nominal and real gold returns. There has been substantial variation in trailing ten year annualized gold returns: from as low as -6% per annum to as high as +20% per annum. Over the same time period the low and high inflation returns were +2.3% per annum and +7.3% per annum. The exhibit suggests that gold is not a very effective long-term inflation hedge when the long-term is defined as 10 years.
