The Golden Dilemmacharvey/Gold_slides.pdf · Erb & Harvey: Gold 2013 1 10 100 1,000 or Basically...

The Golden Dilemma

Campbell R. Harvey Investment Strategy Advisor, Man Group plc

and

Duke University

Credits

• Joint research project with my long-time coauthor, Claude Erb

• Paper available at:

http://ssrn.com/abstract=2078535

2 Erb & Harvey: Gold 2013

http://ssrn.com/abstract=2078535

Buffett 2012

• What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As “bandwagon” investors join any party, they create their own truth – for a while.”


Dalio 2012

• Gold is a very underowned asset, even though gold has become much more popular. If you ask any central bank, any sovereign wealth fund, any individual what percentage of their portfolio is in gold in relationship to financial assets, you'll find it to be a very small percentage. It's an imprudently small percentage, particularly at a time when we're losing a currency regime.


Goals

• Very little academic research – except for the literature on the gold standard for exchange determination

• What role – if any – does gold play in a well diversified portfolio?

• How should we think about the “fair price” of gold?


Arguments for Holding Gold

• gold is an “inflation hedge”

• gold is a “currency hedge”

• gold is an “asset allocation alternative to assets with low real returns”

• gold is a “safe haven/tail risk protect policy”

• “the world is de facto returning to a gold standard/gold is money”

• gold is “under owned” argument.


1. Inflation Hedge

• Many reasons to be worried about future unexpected inflation


8

1. Inflation Hedge

8

Global official reserves of paper

currency have exploded relative to gold:

Central bank balance sheets

have expanded aggressively:

Erb & Harvey: Gold 2013

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

World Official Reserves (SDR trillions)

Currencies

Gold

0%

10%

20%

30%

40%

50%

60%

70%

ECB (Assets)

Fed (Assets)

BoE (Assets)

Official Balance Sheets, Share of Nominal GDP

y = 3.8479x - 85.431 R² = 0.3902

$0

$200

$400

$600

$800

$1,000

$1,200

$1,400

$1,600

$1,800

$2,000

0 50 100 150 200 250

Spo

t G

old

Pri

ce

(Jan

uar

y 1

97

5 t

o M

arch

20

12

)

U.S. Consumer Price Index (January 1975 to March 2012)

Value of gold since legal to hold gold in U.S. If gold moved with inflation, current price would be $810 (February 2013, CPI)

9

1. Inflation Hedge


0

1

2

3

4

5

6

7

8

9

10

Gold Price/U.S. CPI Index

We pick a numeraire. Average ratio of Gold to CPI is 3.2

Data source: Bloomberg, U.S. Bureau of Labor Statistics. Date range: January 1975 to March 2012.

10

Average: 3.2

1. Inflation Hedge

Current=7.31


11

1. Inflation Hedge


U.S. Actual and Inflation Adjusted Gold Price

Strong Trend in Nominal Price y = 0.0524x - 1320.3; R² = 0.3975

No Trend in Inflation Adjusted Price y = 0.0028x + 658.17

R² = 0.0011

0

500

1,000

1,500

2,000

2,500

Loca

l Cu

rren

cy A

ctu

al a

nd

Infl

atio

n A

dju

sted

Go

ld P

rice

Actual Price Inflation Adjusted Price

Data source: Bloomberg, IMF. U.S. CPI Urban Consumers, SA. Index rescaled=1.0 in August 2012. Local currency is the U.S. dollar.

-15%

-10%

-5%

0%

5%

10%

15%

20%

25%10 Year Nominal Gold Return 10 Year CPI Inflation Rate 10 Year Real Gold Return

12

1. Inflation Hedge



Erb & Harvey: Gold 2013 13

1. Inflation Hedge

Data source: Bloomberg. Time period: January 1975 to March 2012. Overlapping returns.

Gold Return Investment Horizon

One Five Ten Fifteen Twenty

Year Years Years Years Years

Inflation R-Squared 15.5% 15.8% 1.2% 1.1% 0.0%

"Real" Price R-Squared 98.3% 95.5% 95.4% 91.7% 92.5%

Gold return standard deviation 26.7% 11.5% 6.8% 4.1% 3.2%

U.S. CPI standard deviation 2.9% 2.3% 1.4% 1.2% 0.9%

"Real price" standard deviation 23.6% 10.4% 6.6% 4.0% 3.2%

14

1. Inflation Hedge

1975-2012 (Annual)


-6%

-4%

-2%

0%

2%

4%

6%

-100% -50% 0% 50% 100% 150% 200%

UnexpectedInflation

Gold Price Change

1980


-15%

-10%

-5%

0%

5%

10%

15%

20%

0 1 2 3 4 5 6 7 8 9 10

Nex

t Te

n Y

ear

Re

al R

etu

rn

Initial “Real Gold Price” (Gold Price/U.S. CPI)

Current=7.31

15

1. Inflation Hedge



1. Inflation Hedge

16 Data source: U.S. GDP deflator from Johnson and Williamson (2011). “Currency regime” labels from Elwell (2011).


1

10

100

1,000

U.S

. GD

P D

efla

tor

Basically SilverAverage inflation rate:

-0.1%/year

Basically GoldAverage inflation rate:

1.1%/year

Fiat Paper MoneyAverage inflation rate:

-0.1%/year

True Gold StandardAverage inflation rate:

0.7%/year

Quasi-Gold StandardAverage inflation rate:

3.2%/year

Fiat MoneyAverage inflation rate:

3.7%/year

1. Inflation Hedge

0

1

2

3

4

5

6

7

8

9

1820-1856 average 1937-1973

average

1975-2012 average=3.2

1791-2012 average

Data source: Economic History (www.eh.net) 17

Gold/CPI


1. Inflation Hedge

$0

$5,000

$10,000

$15,000

$20,000

$25,000

$30,000

$35,000

$40,000

0

20

40

60

80

100

120

U.S

. P

er

Cap

ita

Dis

po

sab

le P

ers

on

al In

com

e in

Ou

nce

s o

f G

old

U.S. Per Capita Nominal Disposable Personal Income In Ounces of Gold

Nominal Disposable personal income:

Data sources: U.S. Bureau of Economic Analysis (www.bea.gov), Bloomberg


http://www.bea.gov/

1. Inflation Hedge

19

*Roman salaries from time of Emperor Augustus, 27BC-AD14 Legionary Pay=225 Denarii; 1 (gold) Aureus=25 Denarii; Aureus=7.85 grams (24ct); 31.103 grams/toz


1. Inflation Hedge

Bottom Line • Not effective short-term hedge

• Not effective long-term (10-year) hedge

• May be effective over very, very long-term

• May be effective in hyperinflationary situation -- assuming real price of gold stable

New research by Erb and Harvey (2012b), “An Impressionist View of the Real Price of Gold around the World,” available at http://ssrn.com/abstract=2148691


2. Currency Hedge

Two ways to think of currency hedge

1. If I hold gold, it protects me against unexpected currency fluctuations • For example, if dollar depreciates by 10% against the yen

and gold increases by 10%, I am protected

2. If I hold gold, it protects me against currency debasement • Could be slow debasement or large (massive printing), e.g.

large gold demand in the Confederate States of America


2. Currency Hedge

Of course, currency is just another way of framing the inflation hedging explanation


2. Currency Hedge

1. Protection against unexpected currency fluctuations.

Need to assume:

• Gold driven by inflation in the home country

• Exchange rates driven by differences in inflation


2. Currency Hedge

24 Data source: Bloomberg

Betas are generally small and negative for most countries


Gold AUD CAD DEM JPY NZD CHF GBP

Gold beta 1.00 -0.16 -0.09 -0.21 -0.14 -0.17 -0.24 -0.15

t-stat -5.95 -5.62 -8.47 -5.46 -5.63 -8.85 -6.12

Correlation with gold 1.00 -0.27 -0.26 -0.37 -0.25 -0.26 -0.39 -0.28

Standard deviation 19.8% 11.7% 6.6% 11.3% 11.3% 12.7% 12.3% 10.4%

R2 100.0% 7.4% 6.6% 13.9% 6.3% 6.7% 15.0% 7.8%

Indexed USD value $9.51 $1.29 $1.00 $0.63 $0.28 $1.62 $0.36 $1.49

(USD/Foreign 1975=1.0)

Time period: 1/75 to 3/12

2. Currency Hedge

1. Coefficients negative. -0.14 for yen means that if we start at 100 yen per dollar and gold rises by 10%, expect rate to go to 98.6 yen per dollar (dollar depreciation)

2. Coefficients far from -1.0. Variance of gold return huge compared to currency. This is also reflected in the low R2.


2. Currency Hedge

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

Loca

l Cu

rren

cy P

rice

Go

ld/L

oca

l In

flat

ion

Ind

ex

Australian Dollar

Canadian Dollar

Deutsche Mark

Japanese Yen

New Zealand Dollar

Swiss Franc

British Pound

US Dollar

Real price of gold using local CPIs Common movement does not imply that gold is a good currency hedge

Data sources: IMF, Bloomberg. All times series normalized to an initial value of 1.0.


3. Alternative to Low Real Return Assets

• The most frequent manifestation of this story is “the price of gold rose because nominal, or real, interest rates fell” argument



0

1

2

3

4

5

6

7

8

9

-1 0 1 2 3 4 5

Re

al P

rice

of

Go

ld

(Pri

ce o

f G

old

/U.S

. CP

I In

dex

)

Real Yield (Ten Year TIPS)

Data source: Bloomberg

January 1997 to March 2012



• Strong correlation -0.82 is likely spurious

• Small sample (U.K. sample period longer and correlation a third of the size)

• More likely explanation is that with very low real rates there is the possibility of a tail event and gold price rises

• There are other stories, such as gold leasing, that are hard to test (given the lack of leasing data).


4. Gold as a Safe Haven

• Gold is a “safe haven” investment

• Purported to protect in “a time of stress”

• However, how do we define stress?



-1.60%

-1.10%

-0.60%

-0.10%

0.40%

0.90%

1.40%

1.90%

-25.00% -20.00% -15.00% -10.00% -5.00% 0.00% 5.00% 10.00% 15.00% 20.00%

Thre

e M

on

th T

-Bill

Mo

nth

ly T

ota

l Ret

urn

(J

anu

ary

19

75

to

Mar

ch 2

01

2)

S&P 500 Monthly Total Return (January 1975 to March 2012)

31

3rd Quadrant A Safe Haven:

0% of observations

2st Quadrant 33% of observations

4th Quadrant 0% of observations

1nd Quadrant 67% of observations

Data sources: Bloomberg and Ibbotson Associates



-33.40%

-23.40%

-13.40%

-3.40%

6.60%

16.60%

26.60%

36.60%

-25.00% -20.00% -15.00% -10.00% -5.00% 0.00% 5.00% 10.00% 15.00% 20.00%

Go

ld M

on

thly

To

tal R

etu

rn

(Jan

uar

y 1

97

5 t

o M

arch

20

12

)

S&P 500 Monthly Total Return (January 1975 to March 2012)

32

3rd Quadrant Not A Safe Haven:

17% of observations

2st Quadrant 20% of observations

4th Quadrant 32% of observations

1nd Quadrant 31% of observations

Data sources: Bloomberg and Ibbotson Associates



33

Source: http://www.britishmuseum.org/explore/highlights/highlight_objects/pe_prb/t/the_hoxne_hoard.aspx

The Hoxne Hoard “Un-Safe Haven”


http://www.britishmuseum.org/explore/highlights/highlight_objects/pe_prb/t/the_hoxne_hoard.aspx


34

Gold “stash” hard to move around


How Many Pounds Does That Weigh?

Price of Gold

$1,200 $1,400 $1,600 $1,800 $2,000

$1,000,000 57 49 43 38 34

$2,000,000 114 98 86 76 69

$3,000,000 172 147 129 114 103

$4,000,000 229 196 172 153 137

Dollar $5,000,000 286 245 215 191 172

Amount $6,000,000 343 294 257 229 206

$7,000,000 401 343 300 267 240

$8,000,000 458 392 343 305 275

$9,000,000 515 441 386 343 309

$10,000,000 572 490 429 381 343


For hyperinflation, some key questions:

• what is the probability of hyperinflation?

• is there any reason to believe that hyperinflation is more likely now than in the past?

• and what might be the magnitude of possible hyperinflation?



36

Hyperinflations


Highest Highest HighestStart End Daily Start End Daily Start End Daily

Country Year Year Inflation Country Year Year Inflation Country Year Year Inflation

Angola 1994 1997 2.1% Danzig 1922 1923 11.4% Philippines 1944 1944 1.6%

Argentina 1989 1990 3.7% Estonia 1992 1992 2.1% Poland 1923 1924 4.5%

Armenia 1992 1992 1.9% France 1795 1796 4.8% Poland 1989 1990 1.9%

Armenia 1993 1994 5.8% Georgia 1992 1992 3.7% Russia 1992 1992 4.2%

Austria 1921 1922 2.8% Georgia 1993 1994 3.9% Soviet Union 1922 1924 3.9%

Azerbaijan 1992 1994 2.6% Germany 1922 1923 20.9% Srpska 1992 1994 64.3%

Belarus 1992 1992 3.2% Germany 1920 1920 1.5% Taiwan 1945 1945 5.5%

Belarus 1994 1994 1.4% Greece 1941 1945 17.9% Taiwan 1947 1947 1.4%

Bolivia 1984 1985 3.5% Hungary 1923 1924 2.3% Taiwan 1948 1949 2.5%

Bosnia 1992 1993 4.9% Hungary 1945 1946 207.0% Tajikistan 1992 1993 3.7%

Brazil 1989 1990 2.0% Kazakhstan 1992 1992 3.0% Tajikistan 1995 1995 1.7%

Bulgaria 1991 1991 2.7% Kazakhstan 1993 1993 1.5% Turkmenistan 1992 1993 5.7%

Bulgaria 1997 1997 4.2% Kyrgyzstan 1992 1992 3.2% Turkmenistan 1995 1996 1.6%

Chile 1973 1973 2.1% Latvia 1992 1992 1.7% Ukraine 1992 1994 4.6%

China 1943 1945 4.8% Lithuania 1992 1992 1.5% Uzbekistan 1992 1992 2.6%

China 1947 1949 14.1% Moldova 1992 1993 4.2% Yugoslavia 1989 1989 1.6%

Congo (Zaire) 1991 1992 2.6% Nicaragua 1986 1991 4.4% Yugoslavia 1992 1994 64.6%

Congo (Zaire) 1993 1994 4.3% Peru 1988 1988 2.6% Zimbabwe 2007 2008 98.0%

Congo (Zaire) 1998 1998 2.0% Peru 1990 1990 5.5%

Note: Data from Hanke and Krus (2012), Bernholz (2006) and McGuire (2010). These sources use a definition from

Cagan (1956) that says hyperinflation exists when a country's monthly inflation rate exceeds 50%.


37

For Brazil 1980-2000, the real price of gold fell by -70%.

But -70% is better than -100% (holding local currency).


Annualized2000/1980 Growth

1980 2000 Ratio Rate

Cruzeiro/USD 65.50 5,362,500,000,000.00 81,870,229,007.63 251.28%

Gold (USD) 589.75 272.25 0.46 -3.79%

Gold (Cruzeiro) 38,628.63 1,459,940,625,000,000.00 37,794,268,499.07 237.96%

Inflation Index (IMF) 86.50 11,092,888,909,767.90 128,238,525,233.73 259.25%

Real Price Ratio 446.56 131.61 0.29 -5.93%

5. De Facto Gold Standard

• Last major country to end convertibility was Switzerland in 2000

• If a gold standard exists then gold is money, but the “gold is money” argument does not require the existence of a gold standard.

• The “gold is money” argument is essentially another way of stating the “constant price when measured in gold” argument.




ATMs available not just in Abu Dhabi. This one is located in Boca Raton, FL


• Ray Dalio: “the price of gold approximates the total amount of money in circulation divided by the size of the gold stock”

• So called “shadow price of gold”…for the U.S. $2.7T/8,300 metric tons=$10,000/oz

• Another version of “gold is an inflation hedge”



0

5,000

10,000

15,000

20,000

25,000

Off

icia

l U.S

. Go

ld H

old

ings

(M

etri

c To

ns)

Official U.S. gold holdings declined during Eisenhower until 1971, when Nixon took U.S. off the gold standard.

41 Data source: World Gold Council

Official gold holdings peaked at about 20,000 metric tons following Roosevelt’s Executive Order 6102 outlawing private ownership of gold



$1

$10

$100

$1,000

$10,000

$100,000

Go

ld P

rice

Per

Ou

nce

Monetary Base Shadow Price M1 Shadow Price M2 Shadow Price Gold Price

42 Data source: World Gold Council, Bloomberg



0

10

20

30

40

50

60

70

80

Shad

ow

Pri

ce/G

old

Pri

ce R

atio

Monetary Base Shadow Price M1 Shadow Price M2 Shadow Price

43 Data source: World Gold Council, Bloomberg



• As an illustration of the “gold is money” concept, the “shadow price of gold” is a rehash of the “gold as an inflation hedge” argument

• It does little to shed light on the dynamics of the price of gold and the real price of gold.


6. Gold is Under Owned

This argument asserts that

• not enough people own gold

• that maybe everyone should own some gold

• the move towards universal gold ownership should cause the nominal and real prices of gold to skyrocket



Supply

• 171,300 metric tons mined since start of civilization

• Entire world stock would be a 67 foot cube

• USGS estimates 51,000 mts likely still in ground – so 76% of potential has already been mined


http://www.gold.org/about_gold/story_of_gold/numbers_and_facts/

http://www.gold.org/about_gold/story_of_gold/numbers_and_facts/


Supply

• About 2,500 mts mined every year

• 80% of world supply mined since 1900 (1.5% increase per year)

• Given USGS estimates of remaining gold, about 20 years supply.



0

500

1,000

1,500

2,000

2,500

3,000

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000

180,000

Wo

rld

Pro

du

ctio

n o

f G

old

in T

on

s

Tota

l Su

pp

ly o

f G

old

in T

on

s

Total Number of Tons of Gold World Production in Tons

Data source: U.S. Geological Service and World Gold Council

48

Annual Global Mine Production and the Total Supply of Gold



0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

Jewelry Privateinvestment

Central Banks Fabrication Other

Esti

mat

ed 2

01

1 A

bo

ve G

rou

nd

Sto

cks

of

Go

ld

(Met

ric

Ton

s)

Data source: World Gold Council, http://www.gold.org/investment/why_how_and_where/why_invest/demand_and_supply/

49

Sectoral Gold Holdings


http://www.gold.org/investment/why_how_and_where/why_invest/demand_and_supply/


Data sources: World Gold Council, Bloomberg. In this case the “ elasticity of demand” is calculated from a regression of log demand on log price.

50

Elasticity of End-Use Demand


Demand (Metric Tons) Production Implied Scrap U.S. Dollar

Year Jewelry Investment Technology (Metric Tons) (Metric Tons) Gold Price

2001 3,009 357 363 2,600 1,129 $279

2002 2,662 343 358 2,550 813 $348

2003 2,484 340 382 2,540 666 $416

2004 2,616 485 414 2,420 1,095 $438

2005 2,718 601 433 2,470 1,282 $519

2006 2,298 676 462 2,370 1,066 $638

2007 2,417 688 465 2,360 1,210 $838

2008 2,192 1,181 439 2,290 1,522 $884

2009 1,760 1,360 373 2,450 1,043 $1,096

2010 2,060 1,333 420 2,560 1,253 $1,421

2011 1,963 1,641 464 2,821 1,247 $1,567

Price elasticity -0.24 0.98 0.10 0.01 0.20


0

500

1,000

1,500

2,000

2,500

3,000

3,500

$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800

De

man

d (

Met

ric

Ton

s)

Price of Gold

Jewelry Demand

Technology Demand

Investment Demand


Data sources: World Gold Council, Bloomberg. Time period 2001 to 2011


0

1

2

3

4

5

6

7

8

9

0

5,000,000

10,000,000

15,000,000

20,000,000

25,000,000

30,000,000

35,000,000

40,000,000

45,000,000

Go

ld P

rice

/U.S

. CP

I In

dex

Ou

nce

s o

f G

old

SPDR Gold Trust Holdings (Number of Ounces of Gold) Gold Price/U.S. CPI Index

52

The “Real” Price of Gold and SPDR Gold Trust Gold Holdings

SPDR GLD has 1,200 mts of gold – more than China’s official holdings

Erb & Harvey: Gold 2013 Data sources: Bloomberg. Time period 11/04 to 3/12


0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

$0

$500

$1,000

$1,500

$2,000

$2,500

$3,000

$3,500

Ch

ine

se F

X R

ese

rve

s

(De

no

min

ate

d in

To

ns

of

Go

ld)

Ch

ine

se F

X R

ese

rve

s

($ in

Bill

ion

s)

China FX Reserves Reserves in Tons of Gold

53

Chinese FX Reserves in U.S. Dollars and Tons of Gold

If China used FX Reserves to buy gold they would take 1/3 of world supply

Erb & Harvey: Gold 2013 Data sources: Bloomberg. Time period 10/95 to 3/12


0

200

400

600

800

1,000

1,200

Ce

ntr

al B

ank

Go

ld R

ese

rve

s

(Met

ric

Ton

s)

Brazil Russia India China

Data source: World Gold Council (Quarterly Gold and FX Reserves 4Q 2011)

54

BRIC Central Bank Gold Reserves



0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

Ce

ntr

al B

ank

Go

ld R

ese

rve

s (2

01

1 Y

E)

(Met

ric

Ton

s)

55 Erb & Harvey: Gold 2013 Data source: World Gold Council (Quarterly Gold and FX Reserves 4Q 2011)


-2,000

-1,500

-1,000

-500

0

500

1,000

Ch

ange

in G

old

Re

serv

es

(M

etri

c To

ns)

Change In Gold Reserves March 2000 to December 2011

56

Excludes 63 countries where |change|<10 mt (which includes U.S. -5.3)

Overall change over 11 years = -2,232.9 mt

Erb & Harvey: Gold 2013 Data source: World Gold Council (Quarterly Gold and FX Reserves 4Q 2011)


Data sources: World Gold Council, International Monetary Fund and Bloomberg http://data.worldbank.org/indicator/NY.GDP.MKTP.CD/countries?display=default

57

BRIC Central Bank Gold Reserves


Estimated Estimated Estimated Estimated

Reserves Reserves Reserves Reserves

2010 If move to US If move to US If move to CHIf move to CH

2010 2010 Central Bank 2010 2010 Gold/GDP Gold/Pop Gold/GDP Gold/Pop

GDP Population Gold Reserves Gold/GDP Gold/Pop. Ratio Ratio Ratio Ratio

(US $ Billions) (Millions) ( m tons) Ratio Ratio ( m tons) ( m tons) ( m tons) ( m tons)

U.S. 14,582 317.6 8,133 0.56 25.61 8,133 8,133 28,957 43,464

Switz. 524 7.6 1,040 1.99 136.85 292 195 1,040 1,040

Brazil 2,088 199.5 34 0.02 0.17 1,165 5,109 4,146 27,302

Russia 1,480 140.4 811 0.55 5.78 825 3,596 2,939 19,214

India 1,729 1,316.3 558 0.32 0.42 964 33,709 3,433 180,139

China 5,879 1,382.2 1,054 0.18 0.76 3,279 35,397 11,673 189,157

Total 11,630 14,659 86,139 52,188 460,316

BRIC Only 2,457 6,233 77,811 22,191 415,812

CBGA Years 9 188 49 1033

Gold in Asset Allocation

58 Data sources: Bloomberg, Barclays


"Global" Market "Global" Market

Capitalization Capitalization

(US $ Trillions) (Share of Total)

Available Gold Available Gold

All Central Bank Only All Central Bank Only

Gold & Investment Investment Gold & Investment Investment

Global Equity $51.40 $51.40 $51.40 50.5% 53.5% 54.5%

Global Fixed Income$41.20 $41.20 $41.20 40.5% 42.9% 43.6%

Gold $9.14 $3.40 $1.79 9.0% 3.5% 1.9%

Total $101.74 $96.00 $94.39 100.0% 100.0% 100.0%

Required Tons of Gold 171,300 63,614 33,588

Percent of Existing Gold Stock 100% 37% 20%

CBGA-like Annual Purchases (Years) 417 155 82

Likelihood Impossible Impractical Unlikely

Conclusions

1) Gold does not provide a hedge of traditional unexpected inflation

2) Currency hedge is really just the inflation hedge argument

3) Gold is useful in hyperinflation – and price can be very sensitive to small probabilities

4) Low real asset return-gold correlation spurious


Conclusions

5) De facto gold standard argument does little to help us understand gold

6) Given limited production, a move by developing markets to hold more gold could exert substantial upward pressure on price

7) If all investors held gold in terms of its weight in “market portfolio”, substantial upward pressure on price

8) Beware of technological change


Conclusions

• Near-earth asteroid Eros might have 125,000 mts (Science, 2009)


Conclusions

• Fritz Haber, Nobel Prize, Chem 1918

• Proposed paying Germany’s WWI reparations by extracting gold from ocean water


• Gold in ocean is 6 parts per trillion or 6 kg for 1 km3

• Oceans = 1.37 billion km3

• Gold in oceans = 8.22 million metric tons

• Value = $423 trillion at $1,600 per troy oz

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