Financial Analysts Journal 6 October 2020 Volume 76 Issue 4
Gold, the Golden Constant, and Déjà Vu
Today’s high real price of gold suggests that gold is an expensive inflation hedge with a low prospective real return. However, the financialization of gold ownership by exchange-traded funds may introduce a period of irrational exuberance.
Currently, the real, or inflation-adjusted, price of gold is almost as high as it was in January 1980 and August 2011. Since 1975, periods of high real gold prices have occurred during periods of elevated concern about high future price inflation. Five years after the real price peaks in January 1980 and August 2011, the nominal (real) prices of gold fell 55% (67%) and 28% (33%), respectively. Today’s high real price of gold suggests that gold is an expensive inflation hedge with a low prospective real return. The financialization of gold ownership by exchange-traded funds, however, may introduce a period of irrational exuberance.
About the Authors
Claude Erb, CFA, is in Los Angeles, California.
Campbell R. Harvey is professor of finance at Duke University and a research associate of the National Bureau of Economic Research in Cambridge, Massachusetts. He served as editor of the Journal of Finance from 2006 to 2012. In 2016, he was elected president of the American Finance Association.
Tadas Viskanta is the founder and editor of Abnormal Returns. He is also the author of Abnormal Returns: Winning Strategies from the Frontlines of the Investment Blogosphere, which culls lessons learned from his time blogging.