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Gold Is a Dull Investment

Gold may offer some insurance against a market meltdown, but there is a cost to own it

04.12.2020

Gold flashes under water

I’ve never been a big fan of gold. It’s not a productive asset, so it doesn’t generate any cash flows, and it’s only worth what someone else is willing to pay for it. Yet there’s evidence that gold can serve as a hedge against a market meltdown and inflation, so it may serve a purpose as a small position in a diversi­fied portfolio. The opportunity cost of holding gold is currently low, as real interest rates are negative.

Yet insurance doesn’t boost expected returns. Rather, it tends to reduce them. There is no compelling economic reason to expect gold to provide strong real (inflation-adjusted) returns over the long term. Gold is far from a perfect hedge against inflation and market tail risk. But then again, nothing is.

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