If you're worried about inflation, well-worn investing wisdom suggests buying gold. And according to a paper recently published in the Journal of Investing, it's completely wrong.
"Gold is a terrible inflation mitigant...no matter the size of the allocation, the level that inflation must reach before gold is added, or the accuracy of the investor's inflation forecast," authors Rob Brown and Bo Wang report.
Since Brown and Wang work for Julex Capital Management, which runs funds designed to outrun inflation, they aren't exactly disinterested parties. But the evidence they marshal is convincing.
Not only do they find that the correlation between gold and inflation is just 0.07, they also show that adding gold to a portfolio composed mostly of stocks and bonds doesn't help block inflation's bite.
Their argument isn't new. It was most memorably made by former Fed Chairman Ben Bernanke, who told a Senate committee in 2013 that "the movements of gold don't predict inflation very well," and in fact, "nobody really understands gold prices, and I don't pretend to understand them either."
So why the persistent belief in gold's value as an inflation hedge? Brown and Wang blame a veritable DSM of investor behavioral biases, including herding, anchoring, and confirmation bias. Investors believe that gold is an inflation hedge, so they remember times when it seemed to work as such and cast other data points aside.
Brown and Wang's paper "is a useful reminder that a popular narrative can survive for decades even when the data do not support it," investment consultant Larry Swedroe writes.
But maybe it's also a reminder of gold's dominion. So strong is its hold on investors' psyches that they are willing to credit gold with magical powers.
And isn't that ability really the best reason to own gold?
Comments