Gold: Not Much Of A Hedge For Anything, Unless You're A Centurion

Gold has many uses, but as a hedge against inflation or a declining dollar, it’s a flop.

That’s the conclusion of an exhaustive article in the current issue of the Financial Analysts Journal, which examines six different explanations for why gold prices rise and fall. Authors Claude Erb and Campbell Harvey, a professor at Duke University’s Fuqua School of Business, conclude that the assumptions of most investors — that gold rises during times of inflation, or serves as a hedge against a collapsing dollar — don’t measure up.

The most likely explanation for why gold prices go up is because gold prices are going up.
Gold, like homes during the housing bubble, displays what economists call “positive price elasticity.” When the price is rising, investors are attracted to gold and buy more. Rising purchases by China and other emerging markets may have driven gold’s price up at the margin, but investors have piled on too. They’ve accumulated 1,000 metric tons of the barbarous relic in the vaults of the SPDR Gold Trust, more than China’s suspected gold inventory. (more)

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