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The Golden Dilemma

Claude B. Erb


Campbell R. Harvey

Duke University - Fuqua School of Business; National Bureau of Economic Research (NBER); Duke Innovation & Entrepreneurship Initiative

May 4, 2013

Financial Analysts Journal, vol. 69, no. 4 (July/August 2013) 10-42.

Gold objects have existed for thousands of years but for many investors gold has only recently become a tradable investment opportunity. Gold has been described as an inflation hedge, a “golden constant”, with a long run real return of zero. Yet over 1, 5, 10, 15 and 20 year investment horizons the variation in the nominal and real returns of gold has not been driven by realized inflation. The real price of gold is currently high compared to history. In the past, when the real price of gold was above average, subsequent real gold returns have been below average. Given this situation is it time to explore “this time is different” rationalizations? We show that new mined supply is surprisingly unresponsive to prices. In addition, authoritative estimates suggest that about three quarters of the achievable world supply of gold has already been mined. On the demand side, we focus on the official gold holdings of many countries. If prominent emerging markets increase their gold holdings to average per capita or per GDP holdings of developed countries, the real price of gold may rise even further from today’s elevated levels. As a result investors in gold face a daunting dilemma: 1) embrace a view that “those who cannot remember the past are condemned to repeat it”, there is a “golden constant” and the purchasing power of gold is likely to fall or 2) embrace a view that “this time is different” and the “golden constant” is dead.

Related research:
Erb and Harvey (2015), The Golden Constant
Erb and Harvey (2012a), An Impressionistic View of the 'Real' Price of Gold Around the World.

Note: This is the final version of the working paper published in the Financial Analysts Journal, vol. 69, no. 4 (July/August 2013): 10–42.

Number of Pages in PDF File: 48

Keywords: Gold, gold price, inflation hedge, gold value, gold standard, currency hedge, gold beta, safe haven, tail protect, insurance, hyperinflation, central bank holdings, asset allocation, diversification, emerging markets, Warren Buffett, Ray Dalio, Jeffrey Gundlach

JEL Classification: G10, G11, G12, G15, G28, E58, N20

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Date posted: June 6, 2012 ; Last revised: August 28, 2015

Suggested Citation

Erb, Claude B. and Harvey, Campbell R., The Golden Dilemma (May 4, 2013). Financial Analysts Journal, vol. 69, no. 4 (July/August 2013) 10-42.. Available at SSRN: http://ssrn.com/abstract=2078535 or http://dx.doi.org/10.2139/ssrn.2078535

Contact Information

Claude B. Erb
TR ( email )
CA 90272
United States
Campbell R. Harvey (Contact Author)
Duke University - Fuqua School of Business ( email )
Box 90120
Durham, NC 27708-0120
United States
919-660-7768 (Phone)
919-660-8030 (Fax)
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Duke Innovation & Entrepreneurship Initiative ( email )
215 Morris St., Suite 300
Durham, NC 27701
United States

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