Another possibility, not unrelated, is the collapse of interest rates. Think of gold as a currency that doesn’t pay interest. It will become more valuable when competing currencies stop paying interest as well.
I don’t see gold as a decent inflation hedge: take its time series and adjust it for inflation. The result bounces around a lot.
That said, saying that gold has no intrinsic (financial) value is a lot like saying a Rembrandt or a Picasso has no intrinsic value. Or stamps. Or baseball cards. Sure, none of them have cash flow, earnings, coupon or yield. But that doesn’t imply that they aren’t susceptible to analysis and study. It’s just that they are also subject to faddish behavior as well.
With land prices, share prices, commodity prices and, increasingly, even wages often showing correlation all around the world, achieving the important goal of diversification becomes more difficult.
Gold is a good “hedge”, or diversifying holding, because it can be usually expected to strongly outperform shares during periods of inflation. Gold also usually does well in stagflationary periods where bonds, shares, and other alternatives all do poorly. This anti-correlation is very useful toward proper diversification.
For someone with several millions of dollars who wanted a near-guarantee of preserving value, a gold holding (e.g. 5% or 10%) might well be worthwhile. Since preserving value against adverse scenarios is the goal of the gold hedge in the first place, and since severe stagflation might lead to social unrest, looting etc., hiding the gold and buying guns or security devices is hardly fantastic.
6. Gold works whether the economy is good or bad: When we have a red hot economy, Gold is your hedge against inflation. When we have a bad economy, Gold is a safe harbor against collapse. It is a one way trade that never fails!
Gold is not a good hedge, hell it’s not even a decent shrubbery.
You’ve given reasons why it’s a bad investment. I don’t disagree.
But it’s still an investment. If you buy something because you expect the price of it to increase, you’re investing in it. It might be a terrible investment, because the price isn’t likely to increase, or because there’s no fundamental value behind it (e.g. Tulip Bubble), but it’s still an investment. Bad investments are still investments. They’re just bad ones.
iamthewalrus(:3= There are accepted definitions of investment that agree and disagree with yours. Old fashioned ones would distinguish investment from speculation.
Agreed.
Disagree, though I don’t think your point is unreasonable. Stocks should do ok during times of inflation, since dividends should grow with inflation as well. Yet stocks did poorly during the 1970s. I think that’s due to high interest rates, but I have not studied the matter. So I’ll simply present this as a counter-hypothesis.
There’s a paper I cited upthread that argued that gold was not a particularly good inflation hedge though.
Oh c’mon. There are lots of commodities that an investor of that scale could buy, assuming they wanted expand out from cash,bonds and stock. Why focus on gold as opposed to other precious or non-precious metals?
Well I always wonder how gold will be used as a means of commerce after the U.S. dollar has presumably lost all value and consumer confidence. Will you simply take a bar to the grocery store and have the grocer shave off a few strips? How many? can you trust him? I don’t see a very satisfying outcome for any consumer who is forced by circumstance to trade with gold and therefore it has no value for me. I am not a dentist. Nor do I have any hobbies which require its use.
I am always reminded, in discussions of this sort, of a Barney Miller episode where Harris is taking advantage of the presence in the squadroom of several Hassidic Jewish diamond merchants. He takes an investment diamond from his jacket and shows it to one of them, hoping the merchant will agree on the tremendous value of his investment. The merchant is not impressed. Forced to respond when Harris presses him on the value, the best he will do is to concede that Harris will certainly get his money back “if someone wants to buy it.”
Gold like a diamond has little intrinsic value. They are marketed and when the market is subject to be flooded as it would have been if Cyprus had sold its gold the supply far exceeds the demand. It is not unlike the demand for tulip bulbs in the seventeenth century.
Your claim that stocks perform poorly when interest rates are high is certainly correct:
[ul][li] Stocks’ earnings or growth now compete with (high) bond interest, so P/E ratios will decline.[/li][li] Profits are likely to be poor in times of high inflation and high interest rates.[/li][/ul]
Thus, you’ve answered your own sub-question (why does gold outperform stocks when inflation and interest are both high?) and we address the other sub-question: Why does gold outperform most stocks when inflation is high and interest rates are low? Briefly, that mode is usually associated with some economic malaise and, therefore, generally poor business profit performance.
I hinted at all this in the post you respond to, and also mention two different commodity-price trends possible in inflationary times. Commodity prices may be rising – indeed this is a likely source of the inflation – but they may also be falling, e.g. when the inflation is a “stagflation,” and in the latter case gold is likely to outperform stocks, bonds, and non-precious metals. Hence the claim that gold has excellent anti-correlation properties for diversification.
Since interest rates are broken down into the following components (source)
risk free rate
expected inflation
default risk
liquidity premium
maturity premium
I’d be interested in knowing when exactly we had high inflation and low interest rates. The only exception I see is when the inflation was sudden and unexpected.
Given Fed policy, one might expect nominal rates to always be high when inflation is high, so let’s consider specifically low real interest rates.
It is enough to note that low real rates imply low demand for and high supply of money. Those are also marks of economic malaise; shares and non-precious metals may be performing poorly and, again, gold is likely to be a good anti-correlated diversification.
As a general rule, that is what tends to happen and why people anticipate inflation by bidding up it’s price - as I have shown.
It sounds like you’re pulling this out of your ass to be honest. We had low real rates during the recession and low real rates now and the underlying economic situation was very different in both instances.
I said “Interest rates”, but I meant “Real interest rates”. Apologies. (For those at home, real interest rates are basically the interest rate minus expected inflation.) So let me rephrase:
Stocks should do ok during times of inflation, since dividends should grow with inflation as well. Yet stocks did poorly during the 1970s. I think that’s due to high inflation-adjusted interest rates, but I have not studied the matter. Meaning I have not stared at charts of inflation, gold, real interest rates, bond prices and stock returns or run various correlations on 1970s data. Nor do I have a clear idea of the time sequencing of stock and gold returns during the 1970s. I do have the impression that gold has been a piss-poor investment over any 30 year interval for the past 100 years. Hey, it might do well in the future. (And it does have a low beta.)
I’m having a little difficulty parsing this word salad. Stagflation is the condition under which there is both high unemployment and high inflation. It occurs when there is an adverse supply shock: two examples are higher energy prices and warfare. AFAIK, commodities in general didn’t do too badly during the stagflating parts of the 1970s: there was certainly rotating enthusiasm for commodities like coffee and diamonds during the era. But again, I haven’t studied the era empirically in great depth.
Something to keep in mind is that many commodities are dollar denominated so when the value of the dollar rises relative to other currencies, especially if you look at that on a trade weighted basis, you’re going to get anomalous results. For example, look at this chart of the value of the USD from 1973 to the present.
I’m not sure what the goldbugs mean by that, but if they mean that it retains some premium over say lead, iron or copper, my guess is that’s probably been true for at least a few thousand years. The only exception I can imagine is when things have been so chaotic in certain places that trade was reduced to pure barter economics.
No, people actually claim that gold never loses value. Google “gold never loses value”, and you’ll see what I mean. Some of those results are qualified, but some are just bold statements of falsehood.
Well, this is a matter of definition. Definitions are analytic tools: the sounds that come from our mouths don’t have intrinsic meaning.
We discussed this in Nov 2009: my take is in post 46-47. Bricker said gold is an investment; Chronos said it wasn’t. I’m not claiming that’s where they ended up: I just want to let you know whom to look out for. It was tangential to the main point of the thread.
In post #21 of that thread, Chronos said this: "When I’m investing, my goal is for my wealth to increase. How can buying gold accomplish this? "
At that time, the spot price of gold was just over $1100 an ounce. It’s currently just over $1400 an ounce.
I believe his question has been answered by the market. The way to increase your wealth is to buy something for less than you can sell it for later.
People who say gold is not an investment do not understand what an investment is. Whether it’s a Rembrandt, physical gold, a house or Apple, Inc., an investment (for the purpose of increasing wealth) is something that you try to buy low and sell high. In that thread, Chronos got very confused about what “investment” means.
Yeah, and every reputable definition I can find includes speculating on the future value of something in the category of investment. Words don’t have intrinsic meaning, but obviously we need to agree on some common meaning in order to effectively communicate. People claiming that gold doesn’t count as an investment are trying to make up a new definition out of whole cloth. I don’t think that such a definition is a useful one, nor is it supported by historical use.
I don’t need to look at another thread to find people claiming gold isn’t an investment. I’ve got them right here in this one. And they’re wrong in both cases by the commonly accepted definition of investment. And there’s already a way to say what they mean using commonly accepted financial language: “Gold is not an income-generating asset”.
