Gold Won't Save You From
Hyperinflation
A new NBER working paper, “The Golden
Dilemma”, looks at the investment history — and
possible investment future — of gold.
Many fascinating nuggets and charts in the research.
Especially interesting is its negative take on gold as
a safe-haven hedge against hyperinflation (or even
regular inflation, for that matter) or other crises:
We also parse the safe
haven argument and come up empty-handed. We examine data
on hyperinflations in both major and minor countries and
find it is certainly possible for the purchasing power
of gold to decline substantially during a highly
inflationary period.
When the price of gold is
high in one country it is probably high in other
countries. Keynes pointed out “that the long run is a
misleading guide to current affairs”. Even if gold is a
“golden constant” in the long run, it does not have to
be a “golden constant” in the short run. Conversely,
current affairs are possibly a misleading guide to the
long run.
The study offers three pieces of evidence:
1. Gold returns are surprisingly correlated with stock
returns, suggesting gold may not be a reliable safe
haven asset during periods of financial stress.The below
chart shows shows the joint distribution of U.S. stock
and gold returns.
Now look at Quadrant 3 where negative equity returns
are matched with negative gold returns. “The simple safe
haven test states that there should be very few
observations in Quadrant 3. In fact, 17% of the monthly
stock and gold return observations fall in Quadrant 3.”
2. In time of crisis, you may not be able to get to
your gold. The paper points to the Hoxne Hoard, “the
largest collection of Roman gold and silver coins
discovered in England.” Apparently it was buried
sometime after 400 A.D. by a wealthy family seeking a
safe haven during a time of great turmoil in the Roman
Empire.
“The fact that the hoard was discovered in 1992 means
that the family failed to reclaim its safe haven
wealth.” And in terms of
market-value-relative-to-weight ratio, “many precious
gems are a more efficient store of flight capital than
gold.”
3. The study look at gold and Brazilian inflation from
1980 through. During that period, Brazil was a monetary
mess with an average annual inflation rate of about 250%
and numerous devaluations. “Yet, using the IMF’s measure
of Brazilian inflation, the real price of gold fell by
about 70% between 1980 and 2000.
This means, broadly and illustratively speaking, that
by the year 2000, an ounce of gold had 30% of its 1980
inflation adjusted purchasing power. … So, if purchasing
power declined 70%, was gold a successful Brazilian
hyperinflation hedge? It depends on one’s perspective.
Compared to an expectation that gold would move
one-for-one with the Brazilian price level then gold was
not a successful hyperinflation hedge between 1980 and
2000.”