Gold versus Economic Disasters

Probably not what the nice ex-baseball player doing coin commercials is telling you, but…

A new study from Harvard researchers looks at whether or not gold “works” as a hedge during financial crises and economic disasters. Here’s what they found:

The two researchers also looked at how gold fared during a series of “macroeconomic disasters” in advanced economies [back to 1836]…

They found that during the 56 disaster periods investigated between 1880 and 2011, gold price gains—after inflation is taken into account—averaged 2.1% a year, not much better than in normal periods, when it rose 1.5%.

In fact, Mssrs. Barro and Misra’s figures show that gold prices swing around almost as much as stock prices—meaning it isn’t the stable investment many think it to be—and yet their return is much closer to what ultrasafe U.S. Treasurys offer.

So, the upside of Treasury bonds with the volatility of stocks. That seems………suboptimal.

At Ritholtz Wealth, our findings are similar. We view gold as a terrific gauge of risk appetite and a really good trading vehicle, like all commodities can be from time to time. But like any other commodity, gold is prone to massive boom / bust cycles and is neither a suitable replacement for cash nor a necessary component of an asset allocation portfolio.

Many financial advisors do believe it’s an essential component but are frequently confusing feelings with evidence. Having a 2% or a 5% “sleeve” of gold may make them (or their clients) feel better, but the evidence says it won’t help or matter. How much would a 2% allocation to anything have to go up in a crisis in order to offset the other 98% of the portfolio’s volatility?

I explain this in full here: A quick note on portfolio construction and gold (TRB)

Gold is having a great year in 2016. Last year it was terrible. In the aught’s decade it worked well. In the 1990’s it couldn’t get arrested. It’s a pendulum, like stock returns, but with a much lower ROI for your trouble. Charlie Bilello wrote the definitive data-heavy piece on what gold is and what it isn’t back in May if you take issue with any of my generalizations.

An asset that drops 40% from peak to trough (as it had between 2011 and 2015) and then rises by 3o% should not be looked at as a “stabilizer”. Moreover, the incredible popularity of the GLD ETF means that gold has become more financialized than ever, and, as such, is de facto a much less effective hedge against the fragility of the financial system.


Gold May Not Be the Safe Haven Investors Think It Is (MoneyBeat)

Read also:

My Views on Gold: Setting the Record Straight (TRB)


If you’re interested in talking to us about your portfolio and our evidence-based approach to investing, get in touch here

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