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Why would anyone invest in gold?

Hebert Lian Published on Mon, Sep 04, 2017 / 10:54 AM GMT+8

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(Aug 28): Gold, gold, who would not like to have some gold? The very word is inextricably tied up with wealth and success: Think gold watches, gold chains and gold bars. We give gold away as dowry. We hoard it in our safes. But is it actually a good investment?

In my experience, gold is a love or-hate-it affair — there’s very little middle ground. There are those who dismiss it as a low-return asset suitable only for doomsday prophets awaiting the next financial collapse. But I also personally know several sophisticated investors who believe in it. Richard Fisher, president of the Federal Reserve Bank of Dallas, and clearly no fool, was cited by CNN in its 2012 article, “Stock picks from Fed officials”, as having more than US$1 million of his US$21 million portfolio allocated to gold, based on his financial disclosures to the Fed. So, the arguments for gold investment deserve objective consideration to sort the myth from reality. Here is what I found.

Gold offers low investment returns with high volatility
The chart tells us why most investors do not have a significant allocation to gold in their portfolio. Over the last 40 years from end-1976 to end-2016, gold returned a puny inflation adjusted 2%. In contrast, from 1978 to 2016, stocks returned an inflation-adjusted 6.6%, while even supposedly conservative bonds returned 3.3%. Over a longer time frame, economists Robert Barro and Sanjay Misra in their 2013 paper “Gold Returns” found even worse inflation- adjusted returns of 1.1% from 1836 to 2011.