The Golden Dilemma

[barry barnitz]

Erb, Claude B. and Harvey, Campbell R., The Golden Dilemma (June 7, 2012). Available at SSRN: http://ssrn.com/abstract=2078535 or http://dx.doi.org/10.2139/ssrn.2078535

Abstract: Gold objects have existed for thousands of years but gold has only been an actively traded object since 1975. Gold has often been described as an inflation hedge. If gold is an inflation hedge then on average its real return should be 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. As a result investors in gold face a daunting dilemma: 1) seek inflation protection by paying a high real gold price that almost guarantees a decline in future purchasing power or 2) avoid gold and run the risk of a decline in future purchasing power if inflation surges. 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.

regards,

[Pointedstick]

I don't see gold as just an inflation hedge. It's also a hedge against shenanigans in the banking system and government, and it's also a small and convenient storehouse of real value. It's also been discussed before that gold doesn't necessarily respond to inflation, but to negative real returns--that is to say, interest rates - inflation.

[craigr]

Thanks for the link, Barry...

[Kshartle]

Gold is money. As goods and services become more plentiful in society because of increased production money can buy more of them. We think of money as peices of paper. Gold is a much better representative of money over a long period of time than peices of paper. Imagine if gold were the only money or we had some sort of gold-based system with zero inflation. Over long periods the price of nearly all goods and services will drop as the supply of them increases or the input costs decreases. Prices have gone through periods of major declines periodically in the country's history due to technical innovation, industrialization etc. Of course the printing press of the government wasn't trying to steal the gains because of the gold standard.

Bottom line to me is that money gains value over time. We measure gold in terms of federal reserve notes which adds more layers of complexity, confusing the value. Whether gold has kept pace with the amount of dollar creation I'm not sure, but I don't think so.

Why would you say that historically the price of gold is high? Do you mean just in dollar terms?

[jediclampet]

Abstract: authoritative estimates suggest that about three quarters of the achievable world supply of gold has already been mined

Is this true?  If so wouldn't it nearly guarantee higher gold prices in the long term?

[craigr]

Abstract: authoritative estimates suggest that about three quarters of the achievable world supply of gold has already been mined

Is this true?  If so wouldn't it nearly guarantee higher gold prices in the long term?

I'll ping Bron Suchecki who posts here. He works at the Perth Mint and they refine somewhere around 99% of Western Australia's gold which represents 10% of annual gold production worldwide. If anyone can offer authoritative comments on this topic, it's him!

[dualstow]

A good link from one of my favorite Bogleheads!

[FarmerD]

Abstract: authoritative estimates suggest that about three quarters of the achievable world supply of gold has already been mined

Is this true?  If so wouldn't it nearly guarantee higher gold prices in the long term?

When I was a kid, I always heard the saying, "Buy land, they don't make any more of it." Can't the same argument be made about gold?  I've read the amount of gold stockpiled in the world increases about 2 percent each year from mining.  Yet the number of middle class people in the world is increasing at a higher rate that that.  Much of the increase in the middle class is occurring in places like India and china where gold is seen as a luxury good as well as a form of savings.

[bronsuchecki]

I think that quote comes from US geological survey dept. I think it is dependent upon current price/economics of mining and can change. There is a big difference between gold in ground and getting it out, so I don't think "reserves" has much bearing on price - it is how much actually gets mined per year that matters.

[smurff]

Achievability percentages varies with changes in technology. Until fracking and extraction from oil sands technologies came along, the percentage of available nat gas and shale oil was lower than it is today. (Not that I'm in favor of fracking or shale oil mining. )

The higher the price of gold, the greater the chances someone will come along to figure out how to get to that "unavailable" gold dissolved in seawater or under the ice in Antarctica.