Current thinking on investing in gold and the gold standard

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http://blogs.cfainstitute.org/investor/2013/03/25/current-thinking-on-investing-in-gold-and-the-gold-standard/

Newly fashionable economist John Maynard Keynes spent much of his career attacking the human instinct to hoard stores of wealth unproductively. For example, the tons of gold buried under millions of Indian floors, rather than invested productively in working assets or contributing to the financial system and magically raising demand through the economic multiplier.

In contrast, Campbell Harvey, a recent speaker at a CFA Conference, argued the case for including gold as a commodity in a well-diversified portfolio, particularly if investors and central banks increase their demand — even moderately — for gold. One driver of demand has been the moves by central banks to diversify away from the dollar into other currencies and assets. In recent years interest in commodities has grown tremendously, partly because commodities are believed to provide direct exposure to unique factors and have special hedging characteristics. One large study finds that gold is a hedge against stocks, on average, and a safe haven, for a limited time, in extreme market conditions. Yet another study finds that holding either commodity indices or commodity futures are inferior to those of traditional stock/bond portfolios.
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Current thinking on investing in gold and the gold standard

  1. 1. Current Thinking on Investing inGold and the Gold Standard
  2. 2. Newly fashionable economist John Maynard Keynes spent much of hiscareer attacking the human instinct to hoard stores of wealthunproductively. For example, the tons of gold buried under millions ofIndian floors, rather than invested productively in working assets orcontributing to the financial system and magically raising demandthrough the economic multiplier.In contrast, Campbell Harvey, a recent speaker at a CFA Conference,argued the case for including gold as a commodity in a well-diversifiedportfolio, particularly if investors and central banks increase their demand— even moderately — for gold. One driver of demand has been themoves by central banks to diversify away from the dollar into othercurrencies and assets. In recent years interest in commodities has growntremendously, partly because commodities are believed to provide directexposure to unique factors and have special hedging characteristics.
  3. 3.  One large study finds that gold is a hedge against stocks, on average, and a safe haven, for a limited time, in extreme market conditions. Yet another study finds that holding either commodity indices or commodity futures are inferior to those of traditional stock/bond portfolios.Further dimensions of the debate around investment in gold emerged at a CFA Institute conference, where Mark Anson, CFA, argued that gold has basically tracked the Dow Jones–UBS Commodity Index and the S&P GSCI up until the past five years. “Since then, gold has disassociated from other commodity values, which is a symptom of a bubble building up,” Anson says. “But it is hard to recognize a bubble in the midst of it and react contemporaneously — that is what makes investing so interesting, fascinating, and, often, frustrating.”
  4. 4. Further reading from CFA Digest’s team of abstractors and other CFA Institute resources on the gold standard and international reserve currencies can be found below:Steps to Making the Renminbi International: The momentum to internationalize the chinese currency, the renminbi, is building up. Wendy Guo, CFA, and Samuel Lum, CFA, review the milestones and challenges of renminbi internationalization.The Truth about Gold: Why It Should (or Should Not) Be Part of Your AssetAllocation Strategy: Most arguments for holding gold in a portfolio are not supported by an analysis of the data. Nonetheless, an argument can be made for including gold as a commodity in a well-diversified portfolio, particularly if investors and central banks increase their demand — even moderately — for gold.Index Investment and the Financialization of Commodities: The authors found that, concurrent with the rapidly growing index investment in commodity markets since the early 2000s, prices of non-energy commodity futures in the United States have become increasingly correlated with oil prices; this trend has been significantly more pronounced for commodities in two popular commodity indices. This finding reflects the financialization of the commodity markets and helps explain the large increase in the price volatility of non-energy commodities around 2008.
  5. 5. Commodities as an Investment Research Foundation Literature Reviews:Interest in commodities has grown tremendously, partly because commoditiesare believed to provide direct exposure to unique factors and have specialhedging characteristics. This review discusses the instruments that provideexposure to commodities, the measures and historical record of commodityinvestment performance, evidence about the benefits of strategic versustactical commodity allocations, and recent developments in the market.Is Gold a Hedge or a Safe Haven? An Analysis of Stocks, Bonds, andGold: The authors test whether gold works as a hedge or a safe haven. Theystudy data from three countries for a 10-year period and find that gold is ahedge against stocks, on average, and a safe haven, for a limited time, inextreme market conditions.Gold: The Ultimate Fiat Currency: The author claims that investors are in themidst of a gold price bubble, and he expects the bubble to burst soon. Heargues that the problems will be compounded by factors that suggest gold is nolonger an effective safe haven for investors.
  6. 6. Should Investors Include Commodities in Their Portfolios After All? NewEvidence: Adding commodities to portfolios is believed to provide superiorrisk-adjusted returns compared with having only traditional asset classes. Theauthors determine that risk-adjusted returns of portfolios holding eithercommodity indices or commodity futures are inferior to those of traditionalstock/bond portfolios. A few exceptions exist, such as the commodities boomduring 2005–2008.Reframing the Gold Standard Debate: The Fixed-Money-SupplyStandard: A debate between those advocating for a fiat money supply andthose advocating for a gold standard has been raging for nearly a century. It’stime to reframe this debate.Poll: What Does Germany’s Repatriation of Gold Reserves Mean?: Weasked for readers’ reactions to Germany’s repatriation of gold reserves.
  7. 7. Gold Investing: What is the “Barbarous Relic” Really Worth?: JohnMaynard Keynes once famously called gold the “barbarous relic,”suggesting that its usefulness and, hence, it’s value, is antiquated. So thequestion really is, or should be, is gold useful today? If so, what is itsvalue? And how much should you pay for it?Investing in Gold: Useful Hedge Or the Ultimate Emotional Investment— Or Both?: Why do so many veteran investors express such vehementdisdain toward gold? Why are others so bullish on it? Given its deeplyrouted mystique, gold can exert a strong emotional pull on investors.The Golden Rule: James Grant explains why he believes the classicalmonetary system called the Gold Standard is the wave of the future.President Nixon: The Man Who Sold the World Fiat Money: PresidentRichard Nixon’s decision to untether the US dollar from gold has left aharsh and lasting legacy for economies all around the globe.

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