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.”