Saturday, February 24, 2018

Gold Inflation Hedge Maybe Not

January 3, 2010 by  
Filed under Inflation Hedge Strategies

Harvard Professor Martin Feldstein doesn’t think that gold is a good hedge against inflation, and he doesn’t think it’s a good hedge against a declining dollar.

He doesn’t discount the possibility that low interest rates and the creation of extensive bank reserves won’t lead to inflation. He just doesn’t think that gold is the all the defensive hedge that it’s cracked up to be.

Feldstein points back to 1980 when the price of gold was $400 and ounce. Ten years late the consumer price index had risen 60%, the price of gold was still sitting at $400 an ounce. Then in 200, the CPI had more than doubled since 1980, but gold was selling for only $300 an ounce.

Feldstein draws a similar conclusion about the declining dollar. From 1980 to 2005 the value of The Yen nearly doubled against the dollar, but if you had “hedged” with gold, you would have been just as well off hanging onto your dollars.

The professor acknowledges that since 2005, gold has nearly tripled. At best he says that “gold is liquid asset that provides diversification in a portfolio of stocks, bonds, and real estate.”

On the other hand, he argues that gold, unlike stocks, bonds, and real estate, “does not reflect underlying earnings. Gold is a purely speculative investment.”

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