Gold Is Not a Good Hedge Against a Bad Economy

Royal Economic SocietyGold has not served very well as a hedge against bad macroeconomic and stock market outcomes. That is the central conclusion of research by Professors Robert Barro and Sanjay Misra, published in the August 2016 issue of the Economic Journal. Their study draws on evidence from long-term US data on gold returns, as well as gold returns during some of the worst macroeconomic disasters experienced across the world.

Gold has historically played a prominent role in transactions among financial institutions even in modern systems that rely on paper money. What’s more, many observers think that gold provides a hedge against major macroeconomic declines. But after assessing long-term US data on gold returns, the new research finds that gold has not served consistently as a hedge against large declines in real GDP or real stock prices.

From 1836 to 2011, gold delivered low average real price appreciation and experienced high average volatility. The mean real rate of price change was 1.1% per year, close to the 1% average real rate of return on three-month US Treasury Bills and comparable assets.

—Royal Economic Society
Gold Has Never Been a Great Hedge Against Bad Economic Times: Evidence From Decades of Us and Global Data

13 thoughts on “Gold Is Not a Good Hedge Against a Bad Economy

  1. In order for gold to be worthwhile, society has to collapse enough that the dollar is literally worthless, but not so much that people won’t still desire some medium of exchange beyond bullets and canned foods.

    • But if society collapses, there won’t be a medium of exchange. People will barter. Anthropologists have looked at how societies without currency work and they are basically credit based and now and then accounts are settled — often in a systematic way.

      When Mansa Musa traveled through the Middle Easy in the 14th century, he spread around so much gold that it threw the region into a years long depression. Of course, Musa’s fortune was more based upon salt. Now salt has real value. Check out the chart here: Gold Is Not a Good Investment—At Least for 500 Years.

      I would be more forgiving of people focused on gold if inflation was a problem. But it isn’t. Even if it were, gold wouldn’t be the answer. But at least I could understand the impulse.

    • Exactly. Salt as a medium exchange is much better. It’s useful and it stores well. People don’t think of it as a store of wealth now because it is too cheap. But in the world after 4 years of President Trump, its value will be much greater.

      • I also made a great pun that no one noticed.

        But yes, salt is a better commodity then gold which is ugly.

        • I’m not good with puns. They come too naturally to without intent. I am most intuitive when it comes to language. Or anything really. But I regret missing your pun.

      • Here is a fun thing. Why does the kid on Morton’s salt containers have an umbrella? Well, for the longest time, granulated salt lumped into chunks when it got really humid. Morton’s put some harmless thing in their salt that kept it from clumping in humidity. In most places, when it gets really humid, that means it’ll rain soon. So, umbrella.

        • That’s fascinating. It sounds like of like folklore, though. But I trust you. I always thought that story about “Shine on You Crazy Diamond” was folklore and it isn’t. I’m just too cynical. Well, not really. It doesn’t matter to me if stories are true. In fact, not being true often makes them better. It’s a better story that Pink Floyd fans constructed the story of Syd Barrett showing up at the studio.

  2. When the price of gold spiked after the Brexit vote, I was reminded of my conviction that the stock and commodity exchanges would not be less rational if they were operated by chickens pecking buy/sell buttons.

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