A Few Words Against Investing in Gold

Gold investors generally give several reasons why they like the yellow metal. A new research report by a couple of serious researchers casts doubt on those reasons. Claude Erb, formerly of TCW, and Campbell Harvey, professor at Duke, took the five reasons people generally give for owning gold and tested gold’s historic performance against them. You can find a summary of the study in Barron’s (subscription might be required).

The five reasons are inflation hedge, currency hedge, hyperinflation hedge, safe haven, and hedge against low interest rates. In general, using data from a number of countries, the researchers found there isn’t a lot of correlation between changes in the price of gold and the factors cited as reasons for owning gold.

But Erb and Harvey say you shouldn’t conclude from the study that you shouldn’t own gold.

The researchers believe that there are other factors, beyond the standard ones that they investigate, that have a big impact on gold’s price. It behooves investors to at least acknowledge that those other factors will greatly affect their returns over the short, intermediate and even longer terms.

One of the counterarguments that the gold bulls make is that gold’s price has been manipulated and that, therefore, all analyses such as the researchers’ are fundamentally flawed. One ancillary implication is that, because it is assumed that all such efforts at manipulation will ultimately fail, gold’s virtues eventually manifest themselves over the very long term.