Here’s a theoretic economic argument for gold: you can’t beat the market so just buy assets in the proportion held by the market. I guess that would be about 1/2 of 1% for gold.
My response: hold on, cowboy. A huge share of that is held by central banks. A significant share of it is held by those without access to developed country financial institutions: the unbanked in India and some Chinese buy gold because of a scarcity of alternatives. Those are the sorts of players you can beat on average, unlike say market timers or interest rate speculators.
Incidentally, we’ve discussed gold in the past and those interested should click links:
I quote myself:
Abstract:
This paper examines several of the explanations commonly provided regarding gold and its price movements. We consider the safe haven, inflation hedge, and dollar destruction hypotheses. The results are mixed. Our data do not support the theories that gold is a safe haven or an inflation hedge. We find that gold is a zero-beta asset and there is a strong negative correlation between gold and the value of the US dollar in the post Bretton-Woods era. The decomposition of gold prices under a semi-structural model find the aggregate demand shock, monetary policy shock and precautionary demand shock of gold all only have modest influence on the price movement of gold.
Note that zero-beat assets won’t go up when the stock market goes down. Zero beta means “Uncorrelated”, not “Negatively correlated”. More:
Instead of viewing gold as a special asset, we suggest the data suggest it is more
reasonable that we view gold as another currency, whose value is a reflection of the value of U.S. dollar.
So do I think that buying gold is a crackpot move? Nah. Mostly ill-advised, but not entirely. It’s shiny. I owned some for a while (not anymore), though not a substantial share of my savings. There are a lot of bad arguments for buying gold though, which makes it a great topic for this message board.