Gold is generally considered a desirable asset and few question its place in portfolio risk management. What is less clear and goes overlooked all too often is the diversity of roles financial actors ascribe to it. One can notice that gold is referred to as a good investment, an item of considerable safety or a stable store of value. Who is right?


The inflation adjusted chart of gold prices over the last hundred years testifies to the fact that gold is a commodity which is far from stable. If one bought, for example, an ounce of gold during the oil crisis of 1973 for 500$ per ounce, it was a great investment if sold about seven years later. But if it was held onto until the year 2000 it showed a loss, a bad investment. And today, eighteen years later, it would be again a good investment.

Gold’s value is not intrinsic and it responds to external factors just like other commodities. There is some use for it in industrial production, but only a small fraction of its volume is used for that end. Its value doesn’t stem from the possibility of productive use within the economy. It lies in the perception of a safe resort in a time of crisis. It is more a matter of culture than anything else.



Gold may be a good investment like other commodities, but this does not mean that by buying it once one can just sit back and passively wait until the cash-out at a higher value. Value swings. Its volatility can be used by a vigilant trader while a passive holder might toss a coin to guess if his investment has brought some yield or not on any day.

The view of gold as a hedge against inflation seems to have some solid ground. The critique of holding physical gold in a well-functioning society also appears reasonable as it is relatively expensive to buy, sell and store gold, whereas yield-bringing assets like inflation-linked short term bonds are easily available. Gold provides a buffer against sudden shocks and runaway inflation, but its benefits should be measured over centuries, not over years. Short-term investors could be disappointed.



Gold is not necessarily a good investment, but I would still recommend it for a diversified portfolio. It might make a good hedge against fiat in troubled times. But how big can the troubles get for this claim to still be justified? Some authors recommend a gold stash in case of the complete collapse of the current financial system. One would no doubt prefer some gold to a substantial amount of paper notes of a system that no longer exists. But would it be easy to use it for trade in a collapsed society where people, as evidence suggests, switch to a barter and gift economy? I believe gold can be of value in a troubled society and of questionable use in a collapsed one. The best use of gold in such a scenario would be to somehow transport it to a society where markets are still functional and exchange it for legal tender. Having said all this, I stress again there is some safety in gold and I would encourage its use as an insurance policy in your portfolio but it is not to be overestimated.



Whether gold can be a good investment idea or a bad one, depends upon timing. In this sense it is like any other commodity used for speculative trading. It is a safe asset in the sense that there is substantial likelihood that it will not follow fiat money when the latter is on the slide. But what gold certainly is not is stable. The price of an ounce of gold quadrupled in value between 1974 and 1980. Since then its movement has been far more volatile than the swings of the world’s major currencies. Safety is a word much better justified to stand next to gold than good investment or stability.


David Prezelj
David Prezelj

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