Can the new gold rush last?

The renewed concerns about the global financial system have put gold into the spotlight recently. Here we review our thoughts on gold and the role gold plays in Aspiriant portfolios.

Gold has historically not been a good investment...

Gold gets a lot of attention when the markets are concerned about paper currency, but gold has not historically had good returns, in part because it does not offer any yield (unlike, say, T-bills). The price of gold dropped steadily from a January 1980 peak of $2,403 (in 2011 dollars) to a recent low of $345 in 1999. In the last 10 years ending December 2010, however, gold has performed very well, achieving returns of more than 17% in 7 of 10 years. We believe this reflects some investors’ overwhelming desire for a haven from equity markets and financial crises and will likely reverse as the global economy finds its footing.

or a good inflation hedge...

Interestingly, though gold is often described as a hedge against inflation, the return to gold has beaten realized inflation only about 50% of the time. Gold performs well during financial crises, but not necessarily well during periods of generalized inflation, especially if interest rates rise (making the opportunity cost of holding gold higher).

Gold does respond to changes in expected inflation, and had a correlation of 0.53 with the Barclays Capital U.S. Treasury Inflation Protected Securities (TIPS) Index over the past three years ending October 31, 2011 (since the financial crisis began in September 2008). This is somewhat higher than the correlation of 0.42 between TIPS and the broader S&P Goldman Sachs Commodity Index over the same period.

Implications for client portfolios

Aspiriant portfolios that include an allocation to commodities futures own a small amount of gold as part of the commodities implementation and additional exposure to gold in the public equity implementation through gold mining companies. We believe that an outsized allocation to gold as a hedge against financial crisis, like an insurance policy with no deductible, is prohibitively expensive. As described elsewhere in this Insight, we believe there are more cost effective ways to manage risk.

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Past performance is not indicative of future results. All investments may lose value. Indexes are unmanaged and may not be directly invested in.