Per Tyler Crowe@Motley Fool:
"A common investing belief is that gold is a good hedge against inflation. That means anytime there’s a period of rising interest rates, investors should allocate capital to gold.
If you dig into the data, though, that investment hasn’t gone as well as one might expect. Authors Robert Johnson and Luis Garcia-Feijoo of the book ‘Invest with the Fed’ went through the returns of stocks and gold in various interest rate environments from 1972, when the U.S. dollar was taken off the gold standard, to 2013. Here’s what they found:
In periods of falling interest rates, stocks returned 14.67% versus 7.85% for gold.
In periods of flat interest rates, stocks returned 10.61% versus 8.61% for gold.
In periods of rising interest rates, stocks returned 8.47% versus 4.86% for gold.
Sure, the expected returns from stocks in a period of rising interest rates are considerably lower than times when rates are flat or falling, but that doesn’t necessarily mean that gold is a more attractive investment than stocks when it happens. The only argument that this could still be the case is that this is only 40 years of data, and it could be too small of a sample size for this investment theory to show up. There are reasons to invest in gold versus stocks or other assets, but the theory that investors should go to gold when interest rates are on the rise doesn’t seem to hold water."
Odd that anyone expected gold to do better in rising interest-rate environments. Rising rates (carrying costs) exert downward pressure on commodities prices in general.
Also, the idea that gold can be seen as a hedge against inflation, while not necessarily wrong per se, is oversimplified. Gold (in the post gold-standard era) is regarded as a hedge against fear. Fear on future inflation is definitely a consideration, but it could be fear of a lot of things. But even that’s not pure. The oldest source of demand for gold — as something beautiful worth owning in its own right (as jewelry, etc.) — has never really gone away. Notice, for example, how gold rose during much of the 2000s, a time when globalization spread and affluent classes increased in China, India, etc. (And, of course, this took place against a background of falling interest rates, which in and of itself, is a plus for commodities, all else being equal.)
As to hedges against inflation or rising rates, perhaps the best may be earnings from a book or newsletter promoting gold as a hedge.
I’ve personally found precious minerals investments, especially in gold, to be among the most promoted “asset classes” in the business. Research, which I conducted about 4 years ago, indicated that nearly the entire gold mining industry was unprofitable, merely coasting on the fumes of elevated gold prices and speculative capital. It’s almost like there is a shadow league of PR spinsters who are doing everything possible to elevate gold prices. To this end, we’ve heard unsubstantiated and misrepresented claims like this so often that many of us just accept it as truth. Marc pointed out some other claims which are used to promote gold as an asset class.
Does this have anything to do with fact that old world banks still have over a century of commercial and industrial supply in the vaults that they are still trying to get rid?
Does it have something to do with the historical over production in the 1990s and 2000s? On related note, over production had driven up the global production cost curve immensely; maybe marketing was part of the solution for pumping up the price curve as well.
These are just theories…
While there is nothing which prevents gold from being an asset class (it has well established and liquid markets; it is generally uncorrelated with other asset classes leading to beneficial effects of diversification; it can be a decent inflation and doomsday hedge; etcetera…), it is still foremost a commodity. It’s value as a medium of exchange almost nil unless you think we’re going back to the pre-Bretton Woods era. Especially now with Blockchain on the rise, it’s looking more like commodity backed currencies are a relic.
