Current Thinking on Investing in Gold and the Gold Standard

Newly fashionable economist John Maynard Keynes spent much of his career attacking the human instinct to hoard stores of wealth unproductively. For example, the tons of gold buried under millions of Indian floors, rather than invested productively in working assets or contributing to the financial system and magically raising demand through the economic multiplier.

In contrast, Campbell Harvey, a recent speaker at a CFA Conference, argued the case for including gold as a commodity in a well-diversified portfolio, particularly if investors and central banks increase their demand — even moderately —  for gold. One driver of demand has been the moves by central banks to diversify away from the dollar into other currencies and assets. In recent years interest in commodities has grown tremendously, partly because commodities are believed to provide direct exposure to unique factors and have special hedging characteristics. One large study finds that gold is a hedge against stocks, on average, and a safe haven, for a limited time, in extreme market conditions. Yet another study finds that holding either commodity indices or commodity futures are inferior to those of traditional stock/bond portfolios.

Further dimensions of the debate around investment in gold emerged at a CFA Institute conference, where Mark Anson, CFA, argued that gold has basically tracked the Dow Jones–UBS Commodity Index and the S&P GSCI up until the past five years. “Since then, gold has disassociated from other commodity values, which is a symptom of a bubble building up,” Anson says. “But it is hard to recognize a bubble in the midst of it and react contemporaneously — that is what makes investing so interesting, fascinating, and, often, frustrating.”

Further reading from CFA Digest’s team of abstractors and other CFA Institute resources on the gold standard and international reserve currencies can be found below:

• Steps to Making the Renminbi International: The momentum to internationalize the chinese currency, the renminbi, is building up. Wendy Guo, CFA, and Samuel Lum, CFA, review the milestones and challenges of renminbi internationalization.
• The Truth about Gold: Why It Should (or Should Not) Be Part of Your Asset Allocation Strategy: Most arguments for holding gold in a portfolio are not supported by an analysis of the data. Nonetheless, an argument can be made for including gold as a commodity in a well-diversified portfolio, particularly if investors and central banks increase their demand — even moderately — for gold.
• Index Investment and the Financialization of Commodities: The authors found that, concurrent with the rapidly growing index investment in commodity markets since the early 2000s, prices of non-energy commodity futures in the United States have become increasingly correlated with oil prices; this trend has been significantly more pronounced for commodities in two popular commodity indices. This finding reflects the financialization of the commodity markets and helps explain the large increase in the price volatility of non-energy commodities around 2008.
• Commodities as an Investment Research Foundation Literature Reviews: Interest in commodities has grown tremendously, partly because commodities are believed to provide direct exposure to unique factors and have special hedging characteristics. This review discusses the instruments that provide exposure to commodities, the measures and historical record of commodity investment performance, evidence about the benefits of strategic versus tactical commodity allocations, and recent developments in the market.
• Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds, and Gold: The authors test whether gold works as a hedge or a safe haven. They study data from three countries for a 10-year period and find that gold is a hedge against stocks, on average, and a safe haven, for a limited time, in extreme market conditions.
• Gold: The Ultimate Fiat Currency: The author claims that investors are in the midst of a gold price bubble, and he expects the bubble to burst soon. He argues that the problems will be compounded by factors that suggest gold is no longer an effective safe haven for investors.
• Should Investors Include Commodities in Their Portfolios After All? New Evidence: Adding commodities to portfolios is believed to provide superior risk-adjusted returns compared with having only traditional asset classes. The authors determine that risk-adjusted returns of portfolios holding either commodity indices or commodity futures are inferior to those of traditional stock/bond portfolios. A few exceptions exist, such as the commodities boom during 2005–2008.
• Reframing the Gold Standard Debate: The Fixed-Money-Supply Standard: A debate between those advocating for a fiat money supply and those advocating for a gold standard has been raging for nearly a century. It’s time to reframe this debate.
• Poll: What Does Germany’s Repatriation of Gold Reserves Mean?: We asked for readers’ reactions to Germany’s repatriation of gold reserves.
• Gold Investing: What is the “Barbarous Relic” Really Worth?: John Maynard Keynes once famously called gold the “barbarous relic,” suggesting that its usefulness and, hence, it’s value, is antiquated. So the question really is, or should be, is gold useful today? If so, what is its value? And how much should you pay for it?
• Investing in Gold: Useful Hedge Or the Ultimate Emotional Investment — Or Both?: Why do so many veteran investors express such vehement disdain toward gold? Why are others so bullish on it? Given its deeply routed mystique, gold can exert a strong emotional pull on investors.
• The Golden Rule: James Grant explains why he believes the classical monetary system called the Gold Standard is the wave of the future.
• President Nixon: The Man Who Sold the World Fiat Money: President Richard Nixon’s decision to untether the US dollar from gold has left a harsh and lasting legacy for economies all around the globe.

Please note that the content of this site should not be construed as investment advice, nor do the opinions expressed necessarily reflect the views of CFA Institute.

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