to financial assets, you'll find it to be a very small percentage. It's animprudently small percentage, particularly at a time when we're losing acurrency regime.
It is not surprising that there is so much disagreement about gold’s future.
This disagreement reflectsthe fact that at least six somewhat different arguments have been advanced for owning gold
gold provides an inflation hedge
gold serves as a currency hedge
gold is an attractive alternative to assets with low real returns
gold a safe haven in times of stress
gold should be held because we are returning to a
world gold standard
The debate over the prospects for gold resembles in some sense the parable of the six blind men andthe elephant.
Different perspectives, different models, lead to different insights. Depending upon whichrationale, or combination of rationales, one embraces, gold is either very expensive or attractive. Thedebate over the value of gold is also an example of a Keynesian beauty contest.
The Keynesian beautycontest framework suggests that the price of gold is not determined by what you think gold is worth.What matters is, for example, what others think others think others think others think gold is worth.While the possible value of all the gold ever mined is about $9 trillion,
only a small amount of goldactually trades in financial markets. We show that the investment demand for gold is characterized by apositive price elasticity. This is one way of referring to momentum investing. As a result, even though
historical measures of “value” might suggest gold is very expensive, it is possible that the actions of a
relatively small number of marginal, momentum, buyers of gold could drive the real and nominal pricemuch higher
(especially if the marginal buyers are not focused on “valuation”).
Gold as an inflation hedge
Probably one of the most widely held beliefs about gold is that it is an inflation hedge. Jastram (1977)pointed out that historically gold has been a poor hedge of inflation in the short run though it has been agood hedge of inflation in the long run. For Jastram, the short run was the next few years and the longrun was perhaps a century. Harmston (1998)
built on Jastrom’s research, finding that in the lo
ng run theprices of some goods, such as bread, seem to command a constant price when denominated in ounces
See World Gold Council (2010).
See Saxe (1872).
See Keynes (1936).
The World Gold Council estimated that at year-end 2011 there were about 171,300 metric tons of gold aboveground. This is a widely referenced estimate of the cumulative amount of gold that has been mined over time. Thefact that this estimate is widely referenced does not mean that it is accurate. Given 32,150 troy ounces per metricton and a price of $1,650 per ounces yields a value of about $9 trillion.