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Investing In Gold: Not As Shiny As You Think

All about investments, personal finance and well-being! But almost always based on academic research.

This is the first article analyzing several of the different investment alternatives that exist (especially the most common and well-known ones). If you don't know what I'm talking about, I invite you to read my first article (the 4 pillars of any investment) so you can see a list of the different investment alternatives that I will constantly analyze. The main goal of this article is to analyze gold from the perspective of an investment, in order to define whether or not it should have a place in our portfolios. Let's not drag this out any longer and get started.

Gold as an investment instrument has always had a great reputation. If you ask any investor or anyone who has some level of knowledge of the world of investments, most will probably tell you that gold is a place to take refuge in periods of crisis and to maintain your purchasing power over time. But is it really so? What conclusions can we draw from studying the academic literature and analyzing hundreds of years of price history? Now we will see.

One of the most famous and recognized papers on investing in gold is "The Gold Dilemma" (Claude E. & Campell H, 2012) whose authors studied gold from various investment perspectives. Specifically, this asset was analyzed from 3 angles :

  1. Long-term reserve of value (hedge against inflation).
  2. Safe asset substitute (low expected returns but low volatility).
  3. Protection against economic crises.

Let us study the main conclusions.

Gold as a store of value

“In normal times, gold doesn't seem to be good at fighting expected or unexpected inflation in the short term. Gold could work very well against inflation over a very long time horizon. However, that long term can be longer than the total life horizon of the investor.” (The Gold Dilemma, Claude E & Campbell H, 2012).

Specifically, the authors found that gold maintained investment value in the face of inflation after approximately 140 years.

In conclusion, gold is not a reliable asset to protect against expected and unexpected inflation in the short term. In the long term, if it manages to overcome inflation and maintain the purchasing power of the investor, but in an extremely long time horizon.

Safe asset alternative (low returns but low volatility)

It was found that gold has low expected returns (approx 3% annualized before inflation), this seems to be quite useful since we are looking for an asset that is not very volatile even if it delivers a low return. However, the volatility of gold leaves much to be desired:

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Between 1988 and July 2019, the return of gold has been 3.43% per year before inflation, while its volatility has been 15.43%. For its part, the MSCI All Country World Index (stock index worldwide) delivered 7.85% before inflation with a volatility of 14.85%. For its part, BND (data extracted by me), an ETF of United States treasury bonds, delivered, from 2007 to 2022, 3.43% before inflation, but with a volatility of 3.72%.

In conclusion, gold gives you the return of the world of bonds, but the volatility (risk) of the world of equities worldwide (the worst combination). If the goal is to reduce volatility, bonds are a much better alternative.

Protection against economic crises

This investment edge is perhaps the most popular. Since I entered the world of investments, I have heard over and over again that gold is a place to protect your capital in scenarios of economic crisis. But let's put opinions aside, let's see what this study tells us.

According to the authors of the paper, a safe asset must meet 2 requirements: Have a good or decent return in times of crisis and be liquid, that is, be able to move and sell it relatively easily.

Regarding its returns, gold shows a relatively random trend in any period (normal or crisis), this led the authors to conclude that it does not have this quality of a safe asset. In addition, it was found that there is no evidence that, in contexts of hyperinflation, gold presents positive returns. In other words, if you are experiencing a period of economic crisis, moving your investments to gold or having gold permanently in your portfolio does not guarantee you practically anything, the result will be random.

Finally, attempting to physically move reasonable or large amounts of gold is no easy task. Take for example the current situation in Ukraine. If you had large amounts of gold and wanted to escape from that country, you would have had a difficult time, not only because of the weight that gold has as an ore, but because if others knew what you were transporting, you could put yourself in a dangerous situation. This last point would not affect you so much if your capital in gold was small and easy to transport.


As we can see, if you decide to invest in gold with the objective of protecting yourself against inflation, then in the short term you will not obtain any benefit, while in the long term you will be able to benefit, as long as you can live hundreds of years (I do not know about you, but that sounds difficult).

In turn, if your objective is to invest in gold with the idea of reducing the volatility of your portfolio, then, according to the data, you will only be able to increase volatility and reduce your expected return.

Finally, if you want to invest in gold to protect your capital in a crisis, then gold is not a good alternative since there is no evidence that it delivers positive returns (or at least not so negative) in these periods (its results are mainly random). If you want to transport small amounts of gold, then this can be useful to maintain your capital. However, this utility is significantly reduced if you have to move large amounts.

I hope you find it useful and you liked this article. As we can see, gold should have very little (if any) place in our portfolios. Many of the qualities that investors attribute to gold are just myths and opinions that do not hold up when analyzed statistically. In the end we can say that gold does not shine as much as many believe.

This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.

© 2022 Nicolas Hidalgo

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