Why investors needn’t – and presently shouldn’t – own gold

Overview

Why should investors own gold? The question is particularly relevant when geo-political tensions are high and rising, fears of recession are growing and stock (but not gold and bond) markets are plummeting. Gold’s advocates have long cited a handful of attributes which justify its purchase. This article ignores miners (which muddy bullion’s waters with company-related risk) and answers four crucial questions:

1. Is gold a reliable, long-term hedge against consumer price inflation? Does it withstand inflation’s effects? Does its rate of return rise as inflation accelerates?
2. Is it a reliable hedge against short-term economic and financial uncertainty? Is it a “safe haven” whose value rises in response to actual geo-political tensions and fears of crises?
3. Does gold reliably withstand recession? Is it a “safe haven” whose value jumps during economic slumps?
4. Does it reduce a diversified portfolio’s overall volatility? Increase its return?

My analysis reaffirms gold’s status as a hedge and safe haven, but finds that its boosters typically – and sometimes greatly – overstate these attributes.

Four of my results are paramount. Firstly, since August 1971, 10-year Treasury bonds (henceforth “bonds”) have generally been a better – and stocks a much better – medium-term hedge than gold against consumer price inflation. Secondly, like gold but unlike stocks, bonds have also been safe havens in times of geo-political tension and economic recession. Indeed, they generally counteract tension and uncertainty better than gold. Thirdly, like stocks but unlike bonds, gold has repeatedly succumbed to cycles of dizzying boom and devastating bust.

Finally, the future is always risky and potentially uncertain. How, then, can investors navigate it safely and with reasonable prospects of long-term gain? Allocating a modest (say, 10%) portion of a conservative investor’s portfolio to gold isn’t a bad option.

However, and as I also demonstrate, over realistic holding periods a portfolio comprising 60% stocks and 40% bonds of various durations has generally been a higher-return but more volatile option than one comprising 60% equities and 40% gold.

Let’s First Clear Some Brush from the Track

“From 1900 through 2022,” writes Jason Zweig in his commentary on Chap. 2 of Benjamin Graham’s classic The Intelligent Investor: The Definitive Book on Value Investing (HarperBusiness, 3^rd revised ed., 2024, p. 60), “gold earned an average return of 0.8% annually after (consumer price) inflation ... Had you invested $1,000 (this and all subsequent amounts are $US) in gold on January 1, 1900, you’d have finished 2022 with about $2,500 – compared with about $7,800 (my calculation is closer to $7,000) in U.S. (Treasury) bonds and more than $2 million (my estimate is ca. $2.5 million) in stocks if you’d put the same $1,000 in each.”

Using data compiled by Robert Shiller and others, I’ve extended and updated Zweig’s results (Figure 1). If in January 1871 an investor purchased $100 worth of gold bullion, bequeathed it to her heirs, who passed it to theirs, etc., then (ignoring holding costs) in December 2024 its current owners would, net of the Consumer Price Index (CPI), own gold worth $552. That’s a compound annual growth rate (CAGR) of 1.0% per year.

During the century to August 1971, gold’s CPI-adjusted CAGR was -0.4% per year; since then, it’s been 4.0% per year.

Figure 1: Investments of $100 in Gold and 10-Year U.S. Treasury Bonds, CPI-Adjusted, January 1871-December 2024

If in January 1871 an investor had purchased $100 worth of 10-Year Treasury bonds, reinvested payments of interest when received and principal when the bonds matured, passed the bonds to his heirs, who reinvested the interest and capital and bequeathed the bonds, etc., then (ignoring tax and the cost of transactions, and net of CPI) in December 2024 its current owners would own bonds worth $3,936.

That’s a CAGR of 2.4% per year. From January 1871 to August 1971, their CAGR was also 2.4%. From then until April 2020, it was 3.5%; from then until December 2024, it was -8.5% per year.

Finally, if in January 1871 an investor purchased $100 worth of stocks which mimicked what in 1926 became Standard & Poor’s 90-stock Composite Index and in 1957 became the Standard & Poor’s 500 Index, reinvested her dividends, passed the shares to her heirs, who reinvested the dividends and bequeathed them to theirs, etc., then in December 2024 its current owners would own a portfolio of shares worth more than $3.5 million (because this amount is so much greater than the two other investments’ market value, I’ve omitted it from Figure 1).

That’s a CAGR of 7.1% per year. Since August 1971, it’s been 6.9% per year. Clearly, over ultra long-term periods stocks outpace inflation far better than bonds and gold.

Equally, nobody avoids tax and costs of transactions, or holds financial assets (as distinct from heirlooms) 150 years or more. These points aside, Zweig’s unstated inference about gold – namely that over the past 125 years it’s been a far worse investment than bonds, never mind stocks – stems from an “apples with giraffes” comparison.

In particular, he overlooks a crucial fact: during the century before August 1971, the U.S. Government defined the $US, albeit increasingly tenuously, with reference to an ounce of gold.

Moreover, and ignoring many complexities, it and most other major nations such as Britain, France, Germany, etc., fixed the price of gold and agreed to exchange their currencies for gold, or gold for their currencies, at this fixed price. During the century from 1871 gold’s price, expressed in $US, thus fluctuated within extremely narrow ranges.

During those years, in other words, the U.S. Government defined the $US with reference to gold, set its price – and thus its exchange rate vis-à-vis gold and other currencies. From 1871 until January 1933, the fixed price varied within the range $19-$21 per ounce; from 1933 to 1968, it fluctuated within the range $34-$36 per ounce; and from 1968 until August 1971, it oscillated within the range $36-$43 per ounce.

In that latter month President Richard Nixon unilaterally “demonetised” gold; that is, he ended the Federal Reserve’s obligation to foreign governments (since 1933, Americans couldn’t legally own gold bullion; Nixon lifted this prohibition) to exchange an ounce of gold for a specified quantity of $US, and vice versa. After the “Nixon shock,” the U.S. Government no longer attempted to fix the price of gold; instead, its price – and the $US’s rate of exchange with other currencies – fluctuated relatively freely in response to market forces.

Valid comparisons compare like with like – such as assets whose prices fluctuate freely. The remainder of my analysis will therefore ignore gold’s fixed price before August 1971 and analyse its fluctuating price thereafter.

Is Gold a Reliable Hedge Against Inflation?

Despite its fixed price during the century to 1971, gold has for centuries and even millennia been regarded as a reliable hedge against consumer price inflation. Zweig gets this crucial point right. As he writes (p. 60), “the same quantity of gold that a Roman centurion earned annually under Emperor Augustus (27 BC – AD 14) would still have covered one’s year’s pay for a U.S. Army captain more than 2,000 years later.”

According to Investopedia, “a perfect hedge is a position that eliminates the risk of an existing position or one that eliminates all market risk from a portfolio” (for details, see “Perfect Hedges: What They Are and How They Are Made,” 28 March 2023). An imperfect hedge against consumer price inflation, for example, mitigates this risk – at the cost of incurring another. If so, then it’s odd – to say the least – that since its demonetisation gold has remained widely regarded as a hedge against consumer price inflation.

That’s because its CPI-adjusted price has been a roller-coaster ride of booms and busts (Figure 2).

Figure 2: Price of Gold, $US, CPI-Adjusted and Nominal, August 1971-December 2024

Six episodes are most noteworthy:

1. Gold’s CPI-adjusted price skyrocketed from $334 in August 1971 to $1,144 in April 1974; that’s a CAGR of almost 59% per year in less than three years;
2. it then rose to $2,766 in January 1980; that’s a CAGR of almost 17% per year;
3. it then collapsed to just $469 in April 2001; that’s a CAGR of -8.0% per year for more than 21 years, and a total loss of more than 80%;
4. it zoomed to $2,489 in September 2011 – a CAGR of 17.2% per year for 10.5 years;
5. it plunged to $1,450 by December 2015; that’s a CAGR of almost -12% per year over more than four years, and a total loss of almost 42%;
6. finally, from September 2022 ($1,805) its price shot to $2,895 in February of this year; that’s a CAGR of almost 21% per year, and a total gain of more than 60%, over this ca. 2.5 year period.

These events raise a crucial question: can such a volatile commodity, which has repeatedly crashed, reliably hedge the risk of inflation? Another key question clearly is: when will gold again collapse? I don’t know – but only a fool would dismiss this risk. If past is prologue, it’s clearly a matter of “when, not if.”

“Weak Form”

Underpinning what I dub the “weak form” of the claim that gold is a reliable, long-term hedge against consumer price inflation is the reality that governments can easily increase the supply of fiat currency – these days, it requires little more than a few keystrokes – but the supply of gold increases only to the extent that producers are prepared to mine and refine it. 

A “fiat currency” is a currency, like the $US since 1971, which is issued by a government or its central bank, and is collateralised by nothing other than the force (“fiat”) of that government. In other words, such a currency, unlike the $US during the century to 1971, isn’t backed by a physical commodity like gold.

Increasing the supply of gold takes considerably more time and effort than increasing the supply of fiat currency. The supply of gold thus increases much more slowly than the supply of fiat currency. Assuming that their demand remains constant (or that the demand for currency decreases), over time the price of gold will rise vis-à-vis the price of currency.

Compared to fiat currency, in other words, over time gold’s CPI-adjusted value will rise.

Figure 3 plots the CPI-adjusted values (in the case of bonds, total return) of investments of $100 in 10-year U.S. Treasury bonds, gold and the $US each month since August 1971. If in that month you placed $100 in a bank’s safe-deposit box and retrieved it in December 2024, you’d still have $100 – but, given the consumer price inflation that occurred over the interim, its purchasing power would’ve shrivelled to just $12.80.

Figure 3: Investments of $100 in 10-Year Treasury Bonds, Gold and $US, CPI-Adjusted, August 1971-December 2024

That’s a decrease of 87.2% and a CAGR of -3.8% per year; in other words, during these years CPI advanced a total of 87.2 ÷ 12.8 = 681% and at the compound rate of 3.8% per year. Conversely, the market value of $100 worth of gold purchased in August 1971 rose to $868 (CPI-adjusted) in December 2024; that’s a CAGR of 4.1% per year.

Over this interval of 53 years and four months, and particularly since late-2021, gold has been a more effective – but also a far more volatile – hedge than 10-year Treasury bonds against consumer price inflation: the market value of $100 worth of bonds purchased in August 1971 rose to $345 (CPI-adjusted) in December 2024; that’s a CAGR of 2.3% per year.

Figure 3 also reveals that, as a hedge against consumer price inflation, gold has two glaring shortcomings. Firstly, it’s been much more volatile (standard deviation of $173) than the bonds ($137). Secondly, over other but nonetheless very long intervals, it’s been a relatively poor hedge: in January 1980, for example, its CPI-adjusted value was $829 – a CAGR of just 0.1% per year over the next 45 years, versus the bonds’ CAGR of 3.5% over that interval.

The point bears emphasis: from January 1980 to December 2024, 10-year Treasury bonds withstood consumer price inflation much better than gold. Is gold a reliable hedge against consumer price inflation? Not really: its efficacy depends upon the interval in question.

The key question therefore becomes: how does gold compare to stocks and bonds as an inflation hedge over a constant and reasonable holding period? Figure 4, which plots their five-year, CPI-adjusted CAGRs, helps to answer this question. It demonstrates that over the medium-term gold has at best been an inconsistently effective hedge: from 1976 to 1981 its five-year CAGR greatly exceeded stocks’ and bonds’; it also significantly outperformed during and for a few years after the GFC. Most recently, since 2019 it’s again outperformed bonds.

Figure 4: Investments in 10-Year Treasury Bonds, Gold and Stocks, CPI-Adjusted, Five-Year CAGRs, August 1976-December 2024

But that’s not Figure 4’s key point: it’s that stocks are generally the best medium-term inflation hedge (average CAGR of 7.4% per year), bonds are second-best (3.1%) and gold is third-best (2.8%).

Even worse for its acolytes, over long stretches gold has provided no protection whatsoever: not only did its CPI-adjusted five-year CAGRs greatly underperform stocks’ and bonds’ from 1982 to 2002; during most of these years its CAGR was negative.

During these 20 years, in other words, gold’s price continuously – and cumulatively massively – failed to withstand consumer price inflation.

Table 1, which summarises key aspects of the three assets’ five-year, CPI-adjusted CAGRs, demonstrates that gold has generally been a poorer medium-term inflation hedge than 10-year Treasury bonds and stocks. Firstly, its mean CAGR is the lowest of the three; secondly, its minimum CAGR is also the lowest; finally and as a related point, the standard deviation of its CAGRs is the largest.

Table 1: Summary Statistics, Three Assets’ Five-Year, CPI-Adjusted CAGRs, August 1976-December 2024

Since 1971, gold has generally been a relatively poor medium-term hedge against consumer price inflation. Bonds have offered a higher average CPI-adjusted return, as well as less extreme and volatile returns and no multi-decade slumps. In these respects, bonds have been a better hedge – and, it bears repetition, stocks have been the best.

“Strong Form”

What I dub the “strong form” of the claim that gold is a reliable hedge against consumer price inflation has short-term and medium-term variants: the greater is the percentage increase of the CPI over a short-term (12-month) and medium-term (60-month) interval, the greater will be gold’s short-term and medium-term return.

Table 2a: CPI-Adjusted Returns, 10-Year Treasury Bond, Gold and S&P 500 Index, by Quintile of CPI, August 1972-December 2024

For each month from August 1971 to December 2024, I (1) computed the CPI’s change over all 12-month intervals (i.e., August 1971-August 1972, September 1971-Septmber 1972, ... December 2023-December 2024); (2) computed gold’s, 10-year Treasuries’ and stocks’ total 12-month CPI-adjusted returns; (3) ranked these data according to change of CPI; (4) divided the data into five groups (“quintiles”) containing equal (net of rounding) numbers of observations; and (5) computed summary statics for each quintile. Table 2a summarises the results. I also repeated these steps for all 60-months intervals and CAGRs (Table 2b).

60% of the time in the short term (i.e., in three of the five quintiles) and 80% in the medium term, stocks outperform; 40% of the time in the short term and 20% in the medium term, gold outperforms; and 20% of the time in the short term and none of the time in the medium term, bonds outperform.

Is gold a reliable hedge against inflation? In two crucial respects, both in the short-term (Table 2a) and medium-term (Table 2b), the “strong form” of the claim have merit: 

1. in the short term, as CPI accelerates, that is, moving from quintile #1 to #2 to #3, etc., gold’s CPI-adjusted return increases and stocks’ and bonds’ generally decrease; accordingly, in quintiles #4 and #5 – 40% of the time – gold’s 12-month return exceeds both stocks’ and bonds’.
2. in the medium-term, except in the 20% of months when CPI’s five-year CAGR is highest (i.e., in quintile #5), returns don’t vary according to CPI’s rate of increase. However, when inflation rises most quickly, gold’s CPI-adjusted return greatly exceeds stocks’ and bonds’.

At high rates of consumer price inflation, whether over 12-month or five-year intervals, gold doesn’t just provide a hedge: it provides a much better one than stocks and bonds.

Table 2b: CPI-Adjusted Returns (CAGRs), 10-Year Treasury Bond, Gold and S&P 500 Index by Quintile of CPI, August 1976-December 2024

In summary, is gold a reliable hedge against consumer price inflation? Over extremely long intervals (50 years or more) it is – but it’s not nearly as good as stocks. Over much shorter intervals when CPI accelerates to high levels, it also is – and does much better than stocks. In general over medium-term holding periods, however, it isn’t as good a hedge as stocks and bonds.

Is Gold a Reliable Hedge Against Economic Uncertainty and Geopolitical Tension?

According to Investopedia (“7 Best Reasons to Invest in Gold: What to Know as Gold Hits Record Prices” (27 November 2024), “global economic uncertainty and geo-political tensions are significant drivers of gold’s appeal since it’s a safe-haven asset.” A “safe-haven asset” tends to maintain or increase its value during periods of feared or actual economic and financial uncertainty or market volatility; it serves as a refuge for investors who seek to protect their capital.

Specifically, gold has long been regarded a “crisis commodity” in the sense that its value often rises during times of economic, financial and geo-political tension or conflict. If so, then it’s an effective hedge against these risks and uncertainties: holding gold helps to protect investors’ portfolios during anxious times.

The “weak form” of the contention is that gold is a safe-haven asset, i.e., it maintains its value during periods of tension and crisis; its “strong form” contends that its value rises during these periods.

How long does a given crisis or period of tension, uncertainty and the like last? Even if one could objectively date the start and end of each crisis, period of tension, etc. (which I strongly doubt), it’s almost certain that the length of each will vary from the others.

Given these and other difficulties, I’ve assumed that three months is a reasonable average length of periods of crisis, tension, etc. On that basis, for each month from January 1985 to December 2024 I’ve (1) computed gold’s, stocks’ and bonds’ rolling three-month CPI-adjusted percentage returns and (2) the rolling three-month percentage change of the Chicago Board Options Exchange’s Volatility Index (“VIX”); (3) sorted the data according to VIX’s three-month change; (4) divided the sorted data into quintiles; and (5) computed summary statistics for each quintile. Table 3 summarises the results.

Table 3: Mean Three-month Returns, CPI-Adjusted, 10-Year Treasury Bond, Gold and S&P 500 Index by Quintile of ΔVIX, January 1985-December 2024

It indicates that the “weak form” – and to some extent the “strong form” – of the contention has merit. All the same, bonds are better hedges than gold against crises and periods of high tension and uncertainty.

Unlike stocks, whose returns decline as VIX’s change accelerates, and which sustain losses when its three-month change rises above 29% per quarter, gold’s quarterly return tends to rise as VIX rises – and remains positive in VIX’s highest quintile.

In two respects, however, bonds are better hedges than gold: firstly, in quintile #5, bonds’ quarterly real return is double gold’s; furthermore, in all quintiles the standard deviation of bonds’ quarterly return is less than gold’s. During times of crisis and tension, bonds outperform stocks and gold, and their higher return is less volatile. That’s a better hedge.

Does Gold Reliably Hedge Against Recession?

Gold has long been widely regarded as insurance against tough times. In “Is Gold The Ultimate Recession Hedge?” Ronald-Peter Stöeferle asks: “how does the gold price perform in recessions?” His answer: “Very well!” He elaborates: “the reasoning behind this performance seems logical. On the one hand, investors are looking for safe havens in times of crisis, and gold is the classical safe-haven asset. On the other hand, many investors will anticipate monetary and fiscal stimuli, and buy gold for inflation protection.”

I’ve merged the dates of U.S. recessions since August 1971 as determined by the National Bureau of Economic Research, the semi-official arbiter of such things, into the data I’ve analysed thus far. Specifically, I’ve distinguished each month which falls within a recession from those that don’t, grouped the data into two (recession and non-recession) groups, and for each group computed relevant summary statistics. Table 4 summarises the results.

Table 4: CPI-Adjusted One-month Returns, 10-Year Treasury Bond, Gold and S&P 500 Index, Within and Outside Recessions, September 1971-December 2024

They’re unambiguous: stocks tend to generate losses during recessions, but gold and ten-year Treasury bonds generate better returns during recessions than they do in non-recessionary periods.

Although gold is a much better hedge (mean return during recessions of 1.3% per month) than bonds (0.62% per month), bonds’ returns fluctuate much less – that is, their standard deviation is much smaller – in periods of both recession and non-recession.

Does Gold Reduce a Portfolio’s Overall Risk? Boost Its Return?

“The most compelling reason to own gold,” says Investopedia, “is its role in portfolio diversification.” Gold is “an excellent tool for reducing overall portfolio risk and potentially enhancing long-term returns. The key to diversification is finding investments that are not closely correlated with one another. Gold has historically had a negative correlation to stocks and other financial instruments.”

In one sense, Investopedia is right: investments which aren’t positively correlated provide the key to diversification and the mitigation of volatility. Indeed, elsewhere (“Negative Correlation: How it Works, Examples and FAQ,” 19 August 2024) it correctly notes: “it’s important for investors to understand the concept of negative correlation since balanced (that is, diversified) portfolios often include assets that have this relationship with one another.”

In another sense, however, Investopedia is wrong: yes, the stock-gold correlation was in the 1970s-1990s mostly negative – but since the turn of the 21^st century it’s usually been positive.

Figure 5: 60-Month Correlations, Stock-Bond and Stock-Gold, August 1976-December 2024

For each rolling 60-month period since August 1971, I correlated gold’s and stocks’ (i.e., the S&P 500 Index’s) total, CPI-adjusted returns (CAGRs). I also correlated stocks and 10-year Treasury’s total, CPI-adjusted returns. Figure 5 plots the results.

Before 2000, the stock-gold correlation was mostly negative; since then, it has become positive. In sharp contrast, before 2000 the stock-bond correlation was mostly positive; since then, it’s mostly been negative.

Before 2000 and by this criterion, in other words, gold was better than the bonds as a portfolio diversifier, i.e., reducer of overall risk and potential enhancer of long-term returns). Since then, however, the bonds have become better than gold.

Moreover, like stocks but more than bonds, gold has been prone to booms and busts. Accordingly, portfolios containing hefty allocations to gold have outperformed all-stock portfolios over some intervals – and also greatly underperformed them and stock-bond portfolio over most.

In this crucial sense, Investopedia is wrong: gold has neither reduced portfolio risk nor enhanced returns.

Figure 6 plots the medium-term (five-year) CAGRs since August 1971 of three portfolios: one comprises 100% stocks and mimics the S&P 500 Index; the second one is weighted 60% to the Index and 40% to 10-year Treasury bonds; and the third one comprises 60% stocks and 40% gold bullion.

Figure 6: Three Portfolios’ CPI-Adjusted, Five-Year CAGRs, Monthly, August 1976-December 2024

Over the medium term, stocks typically outperform bonds and gold: the S&P 500’s average five-year, CPI-adjusted CAGR (7.4% per year) exceeds bonds’ (3.1%) and gold’s (2.8%). Accordingly, on average an all-stock portfolio also outperforms the stocks- bonds (5.7%) and stocks-gold (5.5%) portfolios.

Given stocks’ general outperformance, what’s the advantage of mixed portfolios – particularly of the stock-bond portfolio? The all-stock portfolio outperforms only at equities’ peaks – the late-1980s, 1990s and most of the time over the past decade. At other times the stock-bond portfolio generates equal returns with lower volatility. Finally, and crucially, it outperforms at stocks’ troughs (mid-1970s and 2003-2013).

What’s the great disadvantage of the stock-gold portfolio? As a result of bullion’s crash in 1980 (recall Figure 2), during the 20 years to the early-2000s it underperformed – often egregiously. Over these decades gold didn’t mitigate a portfolio’s risk: it continuously magnified it.

The stock-bond portfolio has outperformed the stock-gold one (average CAGRs of 5.7% and 5.5% per year, respectively). It can also lag the others. Indeed, over the past three years it’s done so.

Significantly, however, this is its first period of underperformance of both the all-stock and the stock-gold portfolios since the half-decade from late-1970s to the early-1980s.

Conclusions

Gold, asserts the World Gold Council (Gold as a strategic asset: 2025 edition, 23 January), “has a key role as a strategic long-term investment and as a mainstay allocation in a well-diversified portfolio.” 

That’s a gross exaggeration: over reasonable holding periods over the past half-century, a stock-bond portfolio has generally outperformed a stock-gold one. 

Investors, WGC continues, “have been able to recognise much of gold’s value over time by maintaining a long-term allocation and taking advantage of its safe-haven status during periods of economic uncertainty.” 

That’s a non sequitur as well as an overstatement: gold’s status as a safe haven derives from its short-term CAGR during such periods – and bonds provide better havens than gold during such periods. 

Why own gold? I’m much less enthusiastic than its boosters. Equally, I’m much more open-minded than most value investors; they’re either dismissive or hostile (see, for example, “3 Things Warren Buffett Has Said About Gold,” NASDAQ Investing News Network, 9 October 2024). Moreover, if I were forced to choose between either gold or a crypto-currency – with no other option possible – I’d choose gold every day of the week and twice on Sundays.

If you’re willing to fool yourself that you can divine the future, and foresee imminent very high (that is, in the top-20% of 12-month and five-year intervals since August 1971) short- and medium-term consumer price inflation, then sell stocks and bonds and buy gold.

Similarly, if you can unerringly prophesy when Donald Trump’s tariffs (or something else) will trigger a recession (whose length and severity you can also precisely predict), then gold is the best option, 10-year Treasuries are second-best and stocks are a relatively bad option. If, however, you can perfectly predict the timing, severity and duration of geo-political tensions and crises, apprehended or real, caused either by The Donald or somebody or something else, then just before they erupt you should greatly boost your holding of bonds – and dump your gold and especially your stocks.

If we’re honest, however, we must acknowledge that neither you nor I or anybody else can accurately and reliably foresee the future. What, then, to do?

Like gold, 10-year Treasury bonds generally (that is, except at very high levels) hedge against consumer price inflation. Indeed, over realistic (five-year) holding periods, bonds are on average more reliable hedges than gold against inflation; they also counteract geo-political uncertainty (but not recession) better than gold. As means of abating equities’ downside and thus mitigating this risk, bonds are also better hedges than gold. Finally, and unlike bonds, gold has repeatedly experienced cycles of dizzying boom and devastating bust.

For these reasons, conservative, long-term investors – as opposed to aggressive, short-term speculators – should prefer bonds to gold. Investors, in short, needn’t own gold. That’s why most – including Leithner & Company – don’t and never have.

A coterie of hard-core zealots has always championed gold, and today’s mania (see below) extends well beyond them (see, for example, “Everyone Is a Gold Bug Now,” The Wall Street Journal, 30 March). Given its recent stellar rise, and the generalisation that mania precedes disappointment – or worse – my hunch is that gold is presently closer to its next bust than to another long boom.

Accordingly, investors worthy of the name should think twice before acquiring their initial stake or adding to their holding.

Anticipating – and Rebutting – a Criticism

I hope that conservative investors will consider my conclusions, but I strongly doubt that gold’s longstanding or newer enthusiasts will. Here’s one of the claims which they’ve increasingly recited over the past year: the world’s central banks are purchasing increasing quantities of gold in order to diversify their reserves, hedge against economic and geo-political uncertainties, etc. Indeed, over the past 2-3 years they’ve purchased record quantities. One advocate thus believes “that central banks are now the main drivers of the long-term price of gold, while investment funds are the main drivers of short-term price swings.”

This assertion isn’t false. It is, however, incomplete and thus potentially misleading: central banks aren’t just buying gold; they’re also selling it.

Using monthly data compiled by the World Gold Council, Figure 7 plots the world’s central banks’ (1) purchases net of sales over the past five years, (2) these net purchases’ 12-month running average, and (3) their 12-month running total.

Each of these three series is trendless: on a monthly basis, over the past five years net purchases haven’t risen; nor has the running 12-month average of net purchases; and the sum of net purchases in the 12 months to December 2024 (468 tonnes) was lower than in the 12 months to December 2019 (702 tonnes).

Figure 7: Central Banks’ Net (of Sales) Purchases of Gold, Tonnes, Monthly, December 2019-December 2024

Central banks’ actions provide no basis for gold’s sharply rising and now record nominal price. It’s likely much more a matter of rising (or rising intolerance of) geo-political tensions and fears of recession – and a strong dash of speculators’ irrational exuberance.

Implications

“Many of the market darlings of the last two years,” noted ausbiz (18 March), “have been from the consumer discretionary, high-PE, growth and tech areas of the market. Unfortunately, (these are) not the types of sectors you want to consider in the current environment. So how are investors going to navigate uncertain times with some safety, and still get some upside? The answer: gold ...”

For an increasing number of speculators – apparently including many who mistakenly regard themselves as investors – gold is the new market darling. If so, and if past is prologue, it likely won’t be in a few years’ time.

Meanwhile, according to The Australian Financial Review (“Gold fever surges, funds spruik 100% gains,” 19 March), “Australian money managers are rushing to open new gold funds to capitalise on the record rally in the precious metal (that’s grossly incorrect; recall Figure 2 and see Figure 8; but who cares about mere facts during a mania!), with some so bullish that they are tipping ... cashed-up (gold) mining stocks to double from here. The euphoria has hit fever pitch after gold prices burst through $US3,000 (per) ounce for the first time late last week, extending a rally that has pushed the price up more than ... 40% in the past year.”

AFR cited one gold fund which “has boasted a net return of more than 40% since its inception in April 2023, bolstered by a nearly 80% surge in the past 12 months.” The fund’s co-founders “are expecting even better returns over the next year.” It and another fund believe “the potential upside ... is 50%-100%” (they don’t deign to say over what future period). A third fund claims that it holds “a carefully selected portfolio of global mining stocks, offering exceptional upside reward for a low level of downside risk.”

That’s what they confidently – I’d say overconfidently – assert, but I don’t like their odds: on a 12-month running basis since August 1971, gold’s CPI-adjusted price has recently been rising at its fastest pace since the GFC (Figure 8). Furthermore, this price is heavily mean-regressing: the greater is its 12-month rise, the greater has been the likelihood that subsequent percentage changes regress – that is, fall – to its mean (6.1%).

Speculators, I’ve observed over the years, naively extrapolate the short-term past into the indefinite future; investors, in sharp contrast, astutely regress the short-term past to its very long-term mean.

Figure 8: Price of Gold, CPI-Adjusted $US, 12-month Percentage Changes, August 1972-December 2024

Hence my suspicion that disappointment – or worse – awaits gold’s latest crop of enthusiasts. As Warren Buffett has repeatedly counselled, you can’t buy what’s popular and do well. Today’s returns are where yesterday’s weren’t; similarly, tomorrow’s will be where today’s aren’t.

No matter: investment banks are eager to feed from the trough. “Last week,” AFR continues, “Macquarie lifted its top-end (gold) price target to $3,500 per ounce, and Bank of America also predicts that bullion will rise to that level over the longer term. Their optimism has trickled down to (retail) investors, who have been net buyers of physically-backed gold ETFs this year, reversing four years of selling.”

Having fearfully declined the opportunity to buy low, these “investors” are now greedily grasping the opportunity to buy high! Elsewhere (“’Gone ballistic’: Soaring gold price revives mothballed mines,” 25 March), AFR reported: “towns like Coolgardie, population 850, are in the midst of a modern gold rush as investors and entrepreneurs scramble for a piece of the action.”

For astute investors, this is merely the latest version of the same, old, tedious movie: with each retelling the plot remains the same; the identities of the protagonists and victims are the only significant changes.

The recent sharp rise of the price of gold, gold funds’ skyrocketing returns, the frenzied creation of new funds and the hyper-confident expectation that recent outsized returns will continue – all these and more are certainly red flags and possibly signs of danger.

One raging bull agrees. Ausbiz opined on 24 March: “as many of you know, I've been banging on about gold for ages. I've gone to gold conferences, soaked up the hype, and come back even more bullish ... We’re in a gold boom. Everyone is long. Everyone.”

That’s laughably hyperbolic: since its formation in 1999, Leithner & Company has never owned gold bullion or shares of gold miners; nor has it – particularly in light of today’s euphoria and overconfidence – any plans to do so. That’s because we’ve done quite well without it (see our web site for details).

In a single passage, ausbiz manages to combine ethnic stereotyping and omissions of crucial facts. It wonders whether today’s mania is “maybe not great? Markets go up when there are buyers. But if everyone is already long, who’s left to buy? Well, central banks, for one. Chinese mums and dads, too.”

Despite these faults, it concludes wisely: “at some point, there’ll be a good old-fashioned tree shake, and the monkeys will come crashing down.”

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