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The Golden Dilemma
Campbell R. Harvey Investment Strategy Advisor, Man Group plc
and
Duke University
Credits
• Joint research project with my long-time coauthor, Claude Erb
• Paper available at:
http://ssrn.com/abstract=2078535
2 Erb & Harvey: Gold 2013
Buffett 2012
• What motivates most gold purchasers is their belief that the ranks of the fearful will grow. During the past decade that belief has proved correct. Beyond that, the rising price has on its own generated additional buying enthusiasm, attracting purchasers who see the rise as validating an investment thesis. As “bandwagon” investors join any party, they create their own truth – for a while.”
3 Erb & Harvey: Gold 2013
Dalio 2012
• Gold is a very underowned asset, even though gold has become much more popular. If you ask any central bank, any sovereign wealth fund, any individual what percentage of their portfolio is in gold in relationship to financial assets, you'll find it to be a very small percentage. It's an imprudently small percentage, particularly at a time when we're losing a currency regime.
4 Erb & Harvey: Gold 2013
Goals
• Very little academic research – except for the literature on the gold standard for exchange determination
• What role – if any – does gold play in a well diversified portfolio?
• How should we think about the “fair price” of gold?
5 Erb & Harvey: Gold 2013
Arguments for Holding Gold
• gold is an “inflation hedge”
• gold is a “currency hedge”
• gold is an “asset allocation alternative to assets with low real returns”
• gold is a “safe haven/tail risk protect policy”
• “the world is de facto returning to a gold standard/gold is money”
• gold is “under owned” argument.
6 Erb & Harvey: Gold 2013
1. Inflation Hedge
• Many reasons to be worried about future unexpected inflation
7 Erb & Harvey: Gold 2013
8
1. Inflation Hedge
8
Global official reserves of paper
currency have exploded relative to gold:
Central bank balance sheets
have expanded aggressively:
Erb & Harvey: Gold 2013
0.0
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
World Official Reserves (SDR trillions)
Currencies
Gold
0%
10%
20%
30%
40%
50%
60%
70%
ECB (Assets)
Fed (Assets)
BoE (Assets)
Official Balance Sheets, Share of Nominal GDP
y = 3.8479x - 85.431 R² = 0.3902
$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
$1,600
$1,800
$2,000
0 50 100 150 200 250
Spo
t G
old
Pri
ce
(Jan
uar
y 1
97
5 t
o M
arch
20
12
)
U.S. Consumer Price Index (January 1975 to March 2012)
Value of gold since legal to hold gold in U.S. If gold moved with inflation, current price would be $810 (February 2013, CPI)
9
1. Inflation Hedge
Erb & Harvey: Gold 2013
0
1
2
3
4
5
6
7
8
9
10
Gold Price/U.S. CPI Index
We pick a numeraire. Average ratio of Gold to CPI is 3.2
Data source: Bloomberg, U.S. Bureau of Labor Statistics. Date range: January 1975 to March 2012.
10
Average: 3.2
1. Inflation Hedge
Current=7.31
Erb & Harvey: Gold 2013
11
1. Inflation Hedge
Erb & Harvey: Gold 2013
U.S. Actual and Inflation Adjusted Gold Price
Strong Trend in Nominal Price y = 0.0524x - 1320.3; R² = 0.3975
No Trend in Inflation Adjusted Price y = 0.0028x + 658.17
R² = 0.0011
0
500
1,000
1,500
2,000
2,500
Loca
l Cu
rren
cy A
ctu
al a
nd
Infl
atio
n A
dju
sted
Go
ld P
rice
Actual Price Inflation Adjusted Price
Data source: Bloomberg, IMF. U.S. CPI Urban Consumers, SA. Index rescaled=1.0 in August 2012. Local currency is the U.S. dollar.
-15%
-10%
-5%
0%
5%
10%
15%
20%
25%10 Year Nominal Gold Return 10 Year CPI Inflation Rate 10 Year Real Gold Return
12
1. Inflation Hedge
Erb & Harvey: Gold 2013
Data source: Bloomberg, U.S. Bureau of Labor Statistics. Date range: January 1975 to March 2012.
Erb & Harvey: Gold 2013 13
1. Inflation Hedge
Data source: Bloomberg. Time period: January 1975 to March 2012. Overlapping returns.
Gold Return Investment Horizon
One Five Ten Fifteen Twenty
Year Years Years Years Years
Inflation R-Squared 15.5% 15.8% 1.2% 1.1% 0.0%
"Real" Price R-Squared 98.3% 95.5% 95.4% 91.7% 92.5%
Gold return standard deviation 26.7% 11.5% 6.8% 4.1% 3.2%
U.S. CPI standard deviation 2.9% 2.3% 1.4% 1.2% 0.9%
"Real price" standard deviation 23.6% 10.4% 6.6% 4.0% 3.2%
14
1. Inflation Hedge
1975-2012 (Annual)
Erb & Harvey: Gold 2013
-6%
-4%
-2%
0%
2%
4%
6%
-100% -50% 0% 50% 100% 150% 200%
UnexpectedInflation
Gold Price Change
1980
Data source: Bloomberg, U.S. Bureau of Labor Statistics. Date range: January 1975 to March 2012.
-15%
-10%
-5%
0%
5%
10%
15%
20%
0 1 2 3 4 5 6 7 8 9 10
Nex
t Te
n Y
ear
Re
al R
etu
rn
Initial “Real Gold Price” (Gold Price/U.S. CPI)
Current=7.31
15
1. Inflation Hedge
Erb & Harvey: Gold 2013
Data source: Bloomberg, U.S. Bureau of Labor Statistics. Date range: January 1975 to March 2012.
1. Inflation Hedge
16 Data source: U.S. GDP deflator from Johnson and Williamson (2011). “Currency regime” labels from Elwell (2011).
Erb & Harvey: Gold 2013
1
10
100
1,000
U.S
. GD
P D
efla
tor
Basically SilverAverage inflation rate:
-0.1%/year
Basically GoldAverage inflation rate:
1.1%/year
Fiat Paper MoneyAverage inflation rate:
-0.1%/year
True Gold StandardAverage inflation rate:
0.7%/year
Quasi-Gold StandardAverage inflation rate:
3.2%/year
Fiat MoneyAverage inflation rate:
3.7%/year
1. Inflation Hedge
0
1
2
3
4
5
6
7
8
9
1820-1856 average 1937-1973
average
1975-2012 average=3.2
1791-2012 average
Data source: Economic History (www.eh.net) 17
Gold/CPI
Erb & Harvey: Gold 2013
1. Inflation Hedge
$0
$5,000
$10,000
$15,000
$20,000
$25,000
$30,000
$35,000
$40,000
0
20
40
60
80
100
120
U.S
. P
er
Cap
ita
Dis
po
sab
le P
ers
on
al In
com
e in
Ou
nce
s o
f G
old
U.S. Per Capita Nominal Disposable Personal Income In Ounces of Gold
Nominal Disposable personal income:
Data sources: U.S. Bureau of Economic Analysis (www.bea.gov), Bloomberg
18 Erb & Harvey: Gold 2013
1. Inflation Hedge
19
*Roman salaries from time of Emperor Augustus, 27BC-AD14 Legionary Pay=225 Denarii; 1 (gold) Aureus=25 Denarii; Aureus=7.85 grams (24ct); 31.103 grams/toz
Erb & Harvey: Gold 2013
1. Inflation Hedge
Bottom Line • Not effective short-term hedge
• Not effective long-term (10-year) hedge
• May be effective over very, very long-term
• May be effective in hyperinflationary situation -- assuming real price of gold stable
New research by Erb and Harvey (2012b), “An Impressionist View of the Real Price of Gold around the World,” available at http://ssrn.com/abstract=2148691
20 Erb & Harvey: Gold 2013
2. Currency Hedge
Two ways to think of currency hedge
1. If I hold gold, it protects me against unexpected currency fluctuations • For example, if dollar depreciates by 10% against the yen
and gold increases by 10%, I am protected
2. If I hold gold, it protects me against currency debasement • Could be slow debasement or large (massive printing), e.g.
large gold demand in the Confederate States of America
21 Erb & Harvey: Gold 2013
2. Currency Hedge
Of course, currency is just another way of framing the inflation hedging explanation
22 Erb & Harvey: Gold 2013
2. Currency Hedge
1. Protection against unexpected currency fluctuations.
Need to assume:
• Gold driven by inflation in the home country
• Exchange rates driven by differences in inflation
23 Erb & Harvey: Gold 2013
2. Currency Hedge
24 Data source: Bloomberg
Betas are generally small and negative for most countries
Erb & Harvey: Gold 2013
Gold AUD CAD DEM JPY NZD CHF GBP
Gold beta 1.00 -0.16 -0.09 -0.21 -0.14 -0.17 -0.24 -0.15
t-stat -5.95 -5.62 -8.47 -5.46 -5.63 -8.85 -6.12
Correlation with gold 1.00 -0.27 -0.26 -0.37 -0.25 -0.26 -0.39 -0.28
Standard deviation 19.8% 11.7% 6.6% 11.3% 11.3% 12.7% 12.3% 10.4%
R2 100.0% 7.4% 6.6% 13.9% 6.3% 6.7% 15.0% 7.8%
Indexed USD value $9.51 $1.29 $1.00 $0.63 $0.28 $1.62 $0.36 $1.49
(USD/Foreign 1975=1.0)
Time period: 1/75 to 3/12
2. Currency Hedge
1. Coefficients negative. -0.14 for yen means that if we start at 100 yen per dollar and gold rises by 10%, expect rate to go to 98.6 yen per dollar (dollar depreciation)
2. Coefficients far from -1.0. Variance of gold return huge compared to currency. This is also reflected in the low R2.
25 Erb & Harvey: Gold 2013
2. Currency Hedge
0.00
0.50
1.00
1.50
2.00
2.50
3.00
3.50
Loca
l Cu
rren
cy P
rice
Go
ld/L
oca
l In
flat
ion
Ind
ex
Australian Dollar
Canadian Dollar
Deutsche Mark
Japanese Yen
New Zealand Dollar
Swiss Franc
British Pound
US Dollar
Real price of gold using local CPIs Common movement does not imply that gold is a good currency hedge
Data sources: IMF, Bloomberg. All times series normalized to an initial value of 1.0.
26 Erb & Harvey: Gold 2013
3. Alternative to Low Real Return Assets
• The most frequent manifestation of this story is “the price of gold rose because nominal, or real, interest rates fell” argument
27 Erb & Harvey: Gold 2013
3. Alternative to Low Real Return Assets
0
1
2
3
4
5
6
7
8
9
-1 0 1 2 3 4 5
Re
al P
rice
of
Go
ld
(Pri
ce o
f G
old
/U.S
. CP
I In
dex
)
Real Yield (Ten Year TIPS)
Data source: Bloomberg
January 1997 to March 2012
28 Erb & Harvey: Gold 2013
3. Alternative to Low Real Return Assets
• Strong correlation -0.82 is likely spurious
• Small sample (U.K. sample period longer and correlation a third of the size)
• More likely explanation is that with very low real rates there is the possibility of a tail event and gold price rises
• There are other stories, such as gold leasing, that are hard to test (given the lack of leasing data).
29 Erb & Harvey: Gold 2013
4. Gold as a Safe Haven
• Gold is a “safe haven” investment
• Purported to protect in “a time of stress”
• However, how do we define stress?
30 Erb & Harvey: Gold 2013
4. Gold as a Safe Haven
-1.60%
-1.10%
-0.60%
-0.10%
0.40%
0.90%
1.40%
1.90%
-25.00% -20.00% -15.00% -10.00% -5.00% 0.00% 5.00% 10.00% 15.00% 20.00%
Thre
e M
on
th T
-Bill
Mo
nth
ly T
ota
l Ret
urn
(J
anu
ary
19
75
to
Mar
ch 2
01
2)
S&P 500 Monthly Total Return (January 1975 to March 2012)
31
3rd Quadrant A Safe Haven:
0% of observations
2st Quadrant 33% of observations
4th Quadrant 0% of observations
1nd Quadrant 67% of observations
Data sources: Bloomberg and Ibbotson Associates
Erb & Harvey: Gold 2013
4. Gold as a Safe Haven
-33.40%
-23.40%
-13.40%
-3.40%
6.60%
16.60%
26.60%
36.60%
-25.00% -20.00% -15.00% -10.00% -5.00% 0.00% 5.00% 10.00% 15.00% 20.00%
Go
ld M
on
thly
To
tal R
etu
rn
(Jan
uar
y 1
97
5 t
o M
arch
20
12
)
S&P 500 Monthly Total Return (January 1975 to March 2012)
32
3rd Quadrant Not A Safe Haven:
17% of observations
2st Quadrant 20% of observations
4th Quadrant 32% of observations
1nd Quadrant 31% of observations
Data sources: Bloomberg and Ibbotson Associates
Erb & Harvey: Gold 2013
4. Gold as a Safe Haven
33
Source: http://www.britishmuseum.org/explore/highlights/highlight_objects/pe_prb/t/the_hoxne_hoard.aspx
The Hoxne Hoard “Un-Safe Haven”
Erb & Harvey: Gold 2013
4. Gold as a Safe Haven
34
Gold “stash” hard to move around
Erb & Harvey: Gold 2013
How Many Pounds Does That Weigh?
Price of Gold
$1,200 $1,400 $1,600 $1,800 $2,000
$1,000,000 57 49 43 38 34
$2,000,000 114 98 86 76 69
$3,000,000 172 147 129 114 103
$4,000,000 229 196 172 153 137
Dollar $5,000,000 286 245 215 191 172
Amount $6,000,000 343 294 257 229 206
$7,000,000 401 343 300 267 240
$8,000,000 458 392 343 305 275
$9,000,000 515 441 386 343 309
$10,000,000 572 490 429 381 343
4. Gold as a Safe Haven
For hyperinflation, some key questions:
• what is the probability of hyperinflation?
• is there any reason to believe that hyperinflation is more likely now than in the past?
• and what might be the magnitude of possible hyperinflation?
35 Erb & Harvey: Gold 2013
4. Gold as a Safe Haven
36
Hyperinflations
Erb & Harvey: Gold 2013
Highest Highest HighestStart End Daily Start End Daily Start End Daily
Country Year Year Inflation Country Year Year Inflation Country Year Year Inflation
Angola 1994 1997 2.1% Danzig 1922 1923 11.4% Philippines 1944 1944 1.6%
Argentina 1989 1990 3.7% Estonia 1992 1992 2.1% Poland 1923 1924 4.5%
Armenia 1992 1992 1.9% France 1795 1796 4.8% Poland 1989 1990 1.9%
Armenia 1993 1994 5.8% Georgia 1992 1992 3.7% Russia 1992 1992 4.2%
Austria 1921 1922 2.8% Georgia 1993 1994 3.9% Soviet Union 1922 1924 3.9%
Azerbaijan 1992 1994 2.6% Germany 1922 1923 20.9% Srpska 1992 1994 64.3%
Belarus 1992 1992 3.2% Germany 1920 1920 1.5% Taiwan 1945 1945 5.5%
Belarus 1994 1994 1.4% Greece 1941 1945 17.9% Taiwan 1947 1947 1.4%
Bolivia 1984 1985 3.5% Hungary 1923 1924 2.3% Taiwan 1948 1949 2.5%
Bosnia 1992 1993 4.9% Hungary 1945 1946 207.0% Tajikistan 1992 1993 3.7%
Brazil 1989 1990 2.0% Kazakhstan 1992 1992 3.0% Tajikistan 1995 1995 1.7%
Bulgaria 1991 1991 2.7% Kazakhstan 1993 1993 1.5% Turkmenistan 1992 1993 5.7%
Bulgaria 1997 1997 4.2% Kyrgyzstan 1992 1992 3.2% Turkmenistan 1995 1996 1.6%
Chile 1973 1973 2.1% Latvia 1992 1992 1.7% Ukraine 1992 1994 4.6%
China 1943 1945 4.8% Lithuania 1992 1992 1.5% Uzbekistan 1992 1992 2.6%
China 1947 1949 14.1% Moldova 1992 1993 4.2% Yugoslavia 1989 1989 1.6%
Congo (Zaire) 1991 1992 2.6% Nicaragua 1986 1991 4.4% Yugoslavia 1992 1994 64.6%
Congo (Zaire) 1993 1994 4.3% Peru 1988 1988 2.6% Zimbabwe 2007 2008 98.0%
Congo (Zaire) 1998 1998 2.0% Peru 1990 1990 5.5%
Note: Data from Hanke and Krus (2012), Bernholz (2006) and McGuire (2010). These sources use a definition from
Cagan (1956) that says hyperinflation exists when a country's monthly inflation rate exceeds 50%.
4. Gold as a Safe Haven
37
For Brazil 1980-2000, the real price of gold fell by -70%.
But -70% is better than -100% (holding local currency).
Erb & Harvey: Gold 2013
Annualized2000/1980 Growth
1980 2000 Ratio Rate
Cruzeiro/USD 65.50 5,362,500,000,000.00 81,870,229,007.63 251.28%
Gold (USD) 589.75 272.25 0.46 -3.79%
Gold (Cruzeiro) 38,628.63 1,459,940,625,000,000.00 37,794,268,499.07 237.96%
Inflation Index (IMF) 86.50 11,092,888,909,767.90 128,238,525,233.73 259.25%
Real Price Ratio 446.56 131.61 0.29 -5.93%
5. De Facto Gold Standard
• Last major country to end convertibility was Switzerland in 2000
• If a gold standard exists then gold is money, but the “gold is money” argument does not require the existence of a gold standard.
• The “gold is money” argument is essentially another way of stating the “constant price when measured in gold” argument.
38 Erb & Harvey: Gold 2013
5. De Facto Gold Standard
39 Erb & Harvey: Gold 2013
ATMs available not just in Abu Dhabi. This one is located in Boca Raton, FL
5. De Facto Gold Standard
• Ray Dalio: “the price of gold approximates the total amount of money in circulation divided by the size of the gold stock”
• So called “shadow price of gold”…for the U.S. $2.7T/8,300 metric tons=$10,000/oz
• Another version of “gold is an inflation hedge”
40 Erb & Harvey: Gold 2013
5. De Facto Gold Standard
0
5,000
10,000
15,000
20,000
25,000
Off
icia
l U.S
. Go
ld H
old
ings
(M
etri
c To
ns)
Official U.S. gold holdings declined during Eisenhower until 1971, when Nixon took U.S. off the gold standard.
41 Data source: World Gold Council
Official gold holdings peaked at about 20,000 metric tons following Roosevelt’s Executive Order 6102 outlawing private ownership of gold
Erb & Harvey: Gold 2013
5. De Facto Gold Standard
$1
$10
$100
$1,000
$10,000
$100,000
Go
ld P
rice
Per
Ou
nce
Monetary Base Shadow Price M1 Shadow Price M2 Shadow Price Gold Price
42 Data source: World Gold Council, Bloomberg
Erb & Harvey: Gold 2013
5. De Facto Gold Standard
0
10
20
30
40
50
60
70
80
Shad
ow
Pri
ce/G
old
Pri
ce R
atio
Monetary Base Shadow Price M1 Shadow Price M2 Shadow Price
43 Data source: World Gold Council, Bloomberg
Erb & Harvey: Gold 2013
5. De Facto Gold Standard
• As an illustration of the “gold is money” concept, the “shadow price of gold” is a rehash of the “gold as an inflation hedge” argument
• It does little to shed light on the dynamics of the price of gold and the real price of gold.
44 Erb & Harvey: Gold 2013
6. Gold is Under Owned
This argument asserts that
• not enough people own gold
• that maybe everyone should own some gold
• the move towards universal gold ownership should cause the nominal and real prices of gold to skyrocket
45 Erb & Harvey: Gold 2013
6. Gold is Under Owned
Supply
• 171,300 metric tons mined since start of civilization
• Entire world stock would be a 67 foot cube
• USGS estimates 51,000 mts likely still in ground – so 76% of potential has already been mined
46 Erb & Harvey: Gold 2013
http://www.gold.org/about_gold/story_of_gold/numbers_and_facts/
6. Gold is Under Owned
Supply
• About 2,500 mts mined every year
• 80% of world supply mined since 1900 (1.5% increase per year)
• Given USGS estimates of remaining gold, about 20 years supply.
47 Erb & Harvey: Gold 2013
6. Gold is Under Owned
0
500
1,000
1,500
2,000
2,500
3,000
0
20,000
40,000
60,000
80,000
100,000
120,000
140,000
160,000
180,000
Wo
rld
Pro
du
ctio
n o
f G
old
in T
on
s
Tota
l Su
pp
ly o
f G
old
in T
on
s
Total Number of Tons of Gold World Production in Tons
Data source: U.S. Geological Service and World Gold Council
48
Annual Global Mine Production and the Total Supply of Gold
Erb & Harvey: Gold 2013
6. Gold is Under Owned
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
Jewelry Privateinvestment
Central Banks Fabrication Other
Esti
mat
ed 2
01
1 A
bo
ve G
rou
nd
Sto
cks
of
Go
ld
(Met
ric
Ton
s)
Data source: World Gold Council, http://www.gold.org/investment/why_how_and_where/why_invest/demand_and_supply/
49
Sectoral Gold Holdings
Erb & Harvey: Gold 2013
6. Gold is Under Owned
Data sources: World Gold Council, Bloomberg. In this case the “ elasticity of demand” is calculated from a regression of log demand on log price.
50
Elasticity of End-Use Demand
Erb & Harvey: Gold 2013
Demand (Metric Tons) Production Implied Scrap U.S. Dollar
Year Jewelry Investment Technology (Metric Tons) (Metric Tons) Gold Price
2001 3,009 357 363 2,600 1,129 $279
2002 2,662 343 358 2,550 813 $348
2003 2,484 340 382 2,540 666 $416
2004 2,616 485 414 2,420 1,095 $438
2005 2,718 601 433 2,470 1,282 $519
2006 2,298 676 462 2,370 1,066 $638
2007 2,417 688 465 2,360 1,210 $838
2008 2,192 1,181 439 2,290 1,522 $884
2009 1,760 1,360 373 2,450 1,043 $1,096
2010 2,060 1,333 420 2,560 1,253 $1,421
2011 1,963 1,641 464 2,821 1,247 $1,567
Price elasticity -0.24 0.98 0.10 0.01 0.20
6. Gold is Under Owned
0
500
1,000
1,500
2,000
2,500
3,000
3,500
$0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 $1,800
De
man
d (
Met
ric
Ton
s)
Price of Gold
Jewelry Demand
Technology Demand
Investment Demand
51 Erb & Harvey: Gold 2013
Data sources: World Gold Council, Bloomberg. Time period 2001 to 2011
6. Gold is Under Owned
0
1
2
3
4
5
6
7
8
9
0
5,000,000
10,000,000
15,000,000
20,000,000
25,000,000
30,000,000
35,000,000
40,000,000
45,000,000
Go
ld P
rice
/U.S
. CP
I In
dex
Ou
nce
s o
f G
old
SPDR Gold Trust Holdings (Number of Ounces of Gold) Gold Price/U.S. CPI Index
52
The “Real” Price of Gold and SPDR Gold Trust Gold Holdings
SPDR GLD has 1,200 mts of gold – more than China’s official holdings
Erb & Harvey: Gold 2013 Data sources: Bloomberg. Time period 11/04 to 3/12
6. Gold is Under Owned
0
10,000
20,000
30,000
40,000
50,000
60,000
70,000
80,000
90,000
$0
$500
$1,000
$1,500
$2,000
$2,500
$3,000
$3,500
Ch
ine
se F
X R
ese
rve
s
(De
no
min
ate
d in
To
ns
of
Go
ld)
Ch
ine
se F
X R
ese
rve
s
($ in
Bill
ion
s)
China FX Reserves Reserves in Tons of Gold
53
Chinese FX Reserves in U.S. Dollars and Tons of Gold
If China used FX Reserves to buy gold they would take 1/3 of world supply
Erb & Harvey: Gold 2013 Data sources: Bloomberg. Time period 10/95 to 3/12
6. Gold is Under Owned
0
200
400
600
800
1,000
1,200
Ce
ntr
al B
ank
Go
ld R
ese
rve
s
(Met
ric
Ton
s)
Brazil Russia India China
Data source: World Gold Council (Quarterly Gold and FX Reserves 4Q 2011)
54
BRIC Central Bank Gold Reserves
Erb & Harvey: Gold 2013
6. Gold is Under Owned
0
1,000
2,000
3,000
4,000
5,000
6,000
7,000
8,000
9,000
Ce
ntr
al B
ank
Go
ld R
ese
rve
s (2
01
1 Y
E)
(Met
ric
Ton
s)
55 Erb & Harvey: Gold 2013 Data source: World Gold Council (Quarterly Gold and FX Reserves 4Q 2011)
6. Gold is Under Owned
-2,000
-1,500
-1,000
-500
0
500
1,000
Ch
ange
in G
old
Re
serv
es
(M
etri
c To
ns)
Change In Gold Reserves March 2000 to December 2011
56
Excludes 63 countries where |change|<10 mt (which includes U.S. -5.3)
Overall change over 11 years = -2,232.9 mt
Erb & Harvey: Gold 2013 Data source: World Gold Council (Quarterly Gold and FX Reserves 4Q 2011)
6. Gold is Under Owned
Data sources: World Gold Council, International Monetary Fund and Bloomberg http://data.worldbank.org/indicator/NY.GDP.MKTP.CD/countries?display=default
57
BRIC Central Bank Gold Reserves
Erb & Harvey: Gold 2013
Estimated Estimated Estimated Estimated
Reserves Reserves Reserves Reserves
2010 If move to US If move to US If move to CHIf move to CH
2010 2010 Central Bank 2010 2010 Gold/GDP Gold/Pop Gold/GDP Gold/Pop
GDP Population Gold Reserves Gold/GDP Gold/Pop. Ratio Ratio Ratio Ratio
(US $ Billions) (Millions) ( m tons) Ratio Ratio ( m tons) ( m tons) ( m tons) ( m tons)
U.S. 14,582 317.6 8,133 0.56 25.61 8,133 8,133 28,957 43,464
Switz. 524 7.6 1,040 1.99 136.85 292 195 1,040 1,040
Brazil 2,088 199.5 34 0.02 0.17 1,165 5,109 4,146 27,302
Russia 1,480 140.4 811 0.55 5.78 825 3,596 2,939 19,214
India 1,729 1,316.3 558 0.32 0.42 964 33,709 3,433 180,139
China 5,879 1,382.2 1,054 0.18 0.76 3,279 35,397 11,673 189,157
Total 11,630 14,659 86,139 52,188 460,316
BRIC Only 2,457 6,233 77,811 22,191 415,812
CBGA Years 9 188 49 1033
Gold in Asset Allocation
58 Data sources: Bloomberg, Barclays
Erb & Harvey: Gold 2013
"Global" Market "Global" Market
Capitalization Capitalization
(US $ Trillions) (Share of Total)
Available Gold Available Gold
All Central Bank Only All Central Bank Only
Gold & Investment Investment Gold & Investment Investment
Global Equity $51.40 $51.40 $51.40 50.5% 53.5% 54.5%
Global Fixed Income$41.20 $41.20 $41.20 40.5% 42.9% 43.6%
Gold $9.14 $3.40 $1.79 9.0% 3.5% 1.9%
Total $101.74 $96.00 $94.39 100.0% 100.0% 100.0%
Required Tons of Gold 171,300 63,614 33,588
Percent of Existing Gold Stock 100% 37% 20%
CBGA-like Annual Purchases (Years) 417 155 82
Likelihood Impossible Impractical Unlikely
Conclusions
1) Gold does not provide a hedge of traditional unexpected inflation
2) Currency hedge is really just the inflation hedge argument
3) Gold is useful in hyperinflation – and price can be very sensitive to small probabilities
4) Low real asset return-gold correlation spurious
59 Erb & Harvey: Gold 2013
Conclusions
5) De facto gold standard argument does little to help us understand gold
6) Given limited production, a move by developing markets to hold more gold could exert substantial upward pressure on price
7) If all investors held gold in terms of its weight in “market portfolio”, substantial upward pressure on price
8) Beware of technological change
60 Erb & Harvey: Gold 2013
Conclusions
• Near-earth asteroid Eros might have 125,000 mts (Science, 2009)
61 Erb & Harvey: Gold 2013
62 Erb & Harvey: Gold 2013
63 Erb & Harvey: Gold 2013
Conclusions
• Fritz Haber, Nobel Prize, Chem 1918
• Proposed paying Germany’s WWI reparations by extracting gold from ocean water
64 Erb & Harvey: Gold 2013
• Gold in ocean is 6 parts per trillion or 6 kg for 1 km3
• Oceans = 1.37 billion km3
• Gold in oceans = 8.22 million metric tons
• Value = $423 trillion at $1,600 per troy oz