Not all that Glitters is Gold with Tadas Viskanta
In the past year, the U.S. saw political volatility, an ongoing pandemic and surging inflation. During that time, the price of gold has considerably fallen. Gold also underperformed other major asset classes such as equities and bonds.
In a paper released a year ago, my co-authors and I looked at the then current price of gold. We found it to be above its ‘fair value’ relative to inflation. We wrote:
Today’s high real price of gold suggests that gold is an expensive inflation-hedge with a low prospective real return.
In short, gold had already priced in a rise in inflation. The paper wasn’t meant as a timing device, but the thesis played during the past twelve months.
Gold seems to be a hedge against inflation over long periods of time. Think decades, not months. In the short term, though, the price of gold is too volatile to be a precise hedge against inflation. Easy access through exchange traded funds has made moving in and out of gold as easy as the push of a button.
For investors in gold, the story has always been more important than the mechanics of its price moves. The problem is that stories change. A few years ago, cryptocurrencies were not an asset class. For many, they now they are. Swapping gold for Bitcoin has been a good trade.
None of this means that the price of gold cannot rise again. Historically gold has made significant advances in short periods of time. The ease of entry and exit, via exchange traded funds, makes this possible.
People have treasured gold for millennia. That won’t turn on a dime. The challenge for investors, however, is accurately determining the timeline of change. This brings us to the present question at hand: Have things changed for gold? The challenge is we won’t know if that’s true for years, if not decades.
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