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Yes, this is elementary economics--and I'm not trying to say that pedantically, it's just easily overlooked. Gold is an inert metal that pays no dividend and in
by jkhdigital 6y ago
Yes, this is elementary economics--and I'm not trying to say that pedantically, it's just easily overlooked. Gold is an inert metal that pays no dividend and incurs storage costs, so any rational market participant who believes that they can achieve a risk-adjusted real return above 0% will not own gold. A poor economic outlook reduces expected real returns on equities, and currency devaluation (i.e. inflation) reduces real returns on fixed-income securities (bonds). Combine the two and you've got a perfect storm for skyrocketing gold prices--just look at the 1970s.
- smabie 6y agoGold is a good investment because it has such low correlation to the broader market. Even though the return of gold is poor, the vol of your portfolio can be significantly reduced. I actually have a blog post https://cryptm.org/posts/2020/07/09/alt.html https://cryptm.org/posts/2020/07/09/alt.html where we create a minimum variance portfolio using gold and the S&P 500. And even though gold has high volatility and poor returns, this approach generates a higher risk adjusted return than the S&P 500. Especially in an age when bonds are no longer countercyclical, gold is an attractive component of a portfolio.
- mantap 6y agoNot just the volatility of your portfolio but the volatility of your life. Market downturns tend to occur coincidently with job losses.
- jkhdigital 6y agoI know that portfolio theory treats the prices of assets like random variables, but I prefer to ground my understanding of asset valuation in human action.