Economics, Pethokoukis

New study: Gold won’t save you from hyperinflation or zombie apocalypse

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A new NBER working paper, “The Golden Dilemma”, looks at the investment history — and possible investment future — of gold. Many fascinating nuggets and charts in the research. Especially interesting is its negative take on gold as a safe-haven hedge against hyperinflation (or even regular inflation, for that matter) or other crises:

We also parse the safe haven argument and come up empty-handed. We examine data on hyperinflations in both major and minor countries and find it is certainly possible for the purchasing power of gold to decline substantially during a highly inflationary period. When the price of gold is high in one country it is probably high in other countries. Keynes pointed out “that the long run is a misleading guide to current affairs”. Even if gold is a “golden constant” in the long run, it does not have to be a “golden constant” in the short run. Conversely, current affairs are possibly a misleading guide to the long run.

The study offers three pieces of evidence:

1. Gold returns are surprisingly correlated with stock returns, suggesting gold may not be a reliable safe haven asset during periods of financial stress.The below chart shows shows the joint distribution of U.S. stock and gold returns. Now look at Quadrant 3 where negative equity returns are matched with negative gold returns. “The simple safe haven test states that there should be very few observations in Quadrant 3. In fact, 17% of the monthly stock and gold return observations fall in Quadrant 3.”

2. In time of crisis, you may not be able to get to your gold. The paper points to the  Hoxne Hoard, “the largest collection of Roman gold and silver coins discovered in England.” Apparently it was buried sometime after 400 A.D. by a wealthy family seeking a safe haven during a time of great turmoil in the Roman Empire. “The fact that the hoard was discovered in 1992 means that the family failed to reclaim its safe haven wealth.” And in terms of  market-value-relative-to-weight ratio, “many precious gems are a more efficient store of flight capital than gold.”

3. The study look at gold and Brazilian inflation from 1980 through. During that period, Brazil was a monetary mess with an average annual inflation rate of about 250% and numerous devaluations. “Yet, using the IMF’s measure of Brazilian inflation, the real price of gold fell by about 70% between 1980 and 2000. This means, broadly and illustratively speaking, that by the year 2000, an ounce of gold had 30% of its 1980 inflation adjusted purchasing power. … So, if purchasing power declined 70%, was gold a successful Brazilian hyperinflation hedge? It depends on one’s perspective. Compared to an expectation that gold would move one-for-one with the Brazilian price level then gold was not a successful hyperinflation hedge between 1980 and 2000.”

13 thoughts on “New study: Gold won’t save you from hyperinflation or zombie apocalypse

  1. LOL…Sorry Jimmy but gold is money, not an an investment class. During times of hyperinflation gold does better than the fiat money that governments use to rob savers of purchasing power. All you have to do is to look to Zimbabwe to see why the paper is absolutely wrong in its conclusions.

  2. I’m no goldbug, but #2 is a cheap shot. What if the family never reclaimed their wealth because they were slaughtered by Anglo-Saxons in the wake of the Roman retreat? What investment vehicle would be a good safe haven for that?

  3. A couple of subtle caveats — i.e., they do not challenge the message of the piece but refine it. Exhibit 14 could best interpreted as Gold is not sufficiently negatively correlated with equity returns (if at all) to make it a hedge (safe heaven). However, is hard to argue that Gold is “surprisignly correlated” — it loohs pretty uncorrelated and as such should provide some diversification but not a fool proof hedge. As to the examle dealing with hyperinflation in Brazil, I would suggest that holding gold mayhave not hedged out all of Brazil price risk, but it would have hedged out the depreciation of the currency against a hard curremcy. Again, the cynic could say: Why not just have sold BR and bought dollars? In this time period that may have been just as good.

  4. Unlike selfish old Keynes followers, I am a young person and thus more interested in the long run than in the short run. I’ll be holding on to my gold for the long run, and making other preparations for the disaster Mr. Keynes’s believers have prepared for me in the meantime. Thanks.

  5. “Gold returns are surprisingly correlated with stock returns”

    I have no idea how the chart leads to that conclusion. There are approximately the same number of data points in the 2nd and 3rd quadrants, meaning if the S&P went down, gold went up or down nearly the same number of times (up slightly more – suggesting a small safe haven effect). Similarly, there are approximately the same number of points in the 1st and 4th quadrants, meaning if the S&P went up, gold went up or down nearly an identical number of times.

    • The banks will be throwing it on the street? First of all, Western banks have already leased out most of their gold. That means that it is likely that they cannot get enough new gold to throw it on the street no matter how much they might want to in order to protect their fiat currencies. This is not a new process. It began with the London Gold Pool in the 1960s and has carried on since. Second, developing world banks have been busy accumulating gold as reserves because they do not trust their USD reserves to hold their purchasing power.

    • Yes, in theory. But back then the dollar was still stable. If we start to get hyperinflation then trading gold for dollars is not just losing 40% but losing 100%. People will hide their gold, trade in the black market, and shoot government officials trying to take their gold, rather than lose 100%.

      • Yes, in theory. But back then the dollar was still stable. If we start to get hyperinflation then trading gold for dollars is not just losing 40% but losing 100%. People will hide their gold, trade in the black market, and shoot government officials trying to take their gold, rather than lose 100%.

        Actually, even in the 1930s very few people turned in their physical gold. The government simply confiscated the gold that was backing the currency as Americans could no longer exchange their notes for the lawful amount of gold that was promised.

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