In Gold We Trust (But Should we?)

People are running for cover.

Increasing stock market volatility (serious swings in stock prices) seems to be sending investors to gold. The precious metal has risen quite a bit since the start of the year – and the high level of trading activity indicates that it could climb even higher.

Of all things…why gold?

People have long had a fascination for the yellow metal. Gold has moved entire societies into action and inspired works of art and terrible violence in equal measure. Gold has many uses: as currency, jewelry and even for industrial purposes.

Gold was used as a currency as early as the 1st century B.C.  It has certain properties that make it particularly attractive as a currency – it can be easily melted down, molded and shaped. It is also chemically inert (won’t turn radioactive and give you weirdo super-powers). We’ve actually used gold as a currency for so long that it was only after World War II that gold-backed currencies were replaced with fiat currencies!  FYI: Fiat money is currency that is backed only by the trust of the people in the government. Astonishingly, Switzerland was the last hold-out, clinging onto their gold-backed currency until 1999.

But…why are investors putting their money, and by proxy their faith, into gold?

Think about the current market environment right now. Stock markets worldwide have seen large dips, even recessions in some parts of the globe. There’s a lot of fear and anxiety about where the market is headed. People are paying very close attention to the U.S. Fed and what their role in this whole thing is going to be. U.S. government bonds, considered a super safe investment, have seen their yields (or return) go down. That means that people are putting more of their money into bonds. (Think: when yields go down, it means prices are increasing. If prices are increasing, it’s because people are buying and demanding more of that good).

Now: if you’re a trader or savvy investor who sees that yields on safe assets (bonds) are going down…you might be tempted to invest elsewhere. Somewhere you can get more bang for your buck. And you might look to commodities.

The school of thought is that commodities, and gold, are a good hedge against inflation. Think about it: if you think inflation is going to rise, eating away your returns in equities, then you might be interested in allocating some of your cash to gold. Likewise, if the dollar is very strong (as it is now), you may imagine that it has nowhere to go but down, then you might see gold as a good investment. When the value of a dollar goes down, gold tends to go up.

So we’re told…

The real deal on gold

Gold has a lot of uses, but studies have shown that as a hedge against inflation…it just doesn’t pass muster.


Source: The Golden Dilemma, Financial Analysts Journal, Volume 69, Number 4

If you look at the figure above, which looks at the month-end value for inflation and the gold price over a 40-year period, you can see that on average: when inflation is high, the price of gold is high. Additionally, though, there are plenty of instances where inflation is high and gold prices are low…and times when inflation is low and gold prices are also low. That’s not how a good hedge should work!

If gold were a good hedge, you’d expect it to hold its value over time.

What about gold versus currency fluctuations?


It’s hit or miss.

Gold seems to work pretty well after 1995 – you can see that the real dollar index and gold move in opposite directions, i.e. they have an inverse relationship. When one is rising, the other’s falling. Prior to 1995, the relationship doesn’t seem to work as well and they basically move together. If you bought gold in 1985 thinking it would hedge against a falling dollar…you’d have to wait 15 years for that relationship to work in your favor.

The reasons why these relationships break down is outside the scope of this article. It’s safe to say, though, that you can’t just take the conventional wisdom at face value. If you’re an investor looking for a safe bet, you might want to think twice before dumping money in gold. Gold could stop working as a hedge versus the dollar at any moment and could stop working for a decade.

What about equities?


Source: The Golden Dilemma, Financial Analysts Journal, Volume 69, Number 4

The above graph plots the monthly return of the S&P500 versus the return on gold in the same month. The result is a cloud shape – indicating that any relationship between the returns on gold and stocks is a random one.

What does this all mean?

If gold, as we’ve shown, is sort of useless as a hedge in all the ways that people typically believe it is…then why do people continue to buy the stuff?

Good question.

Many researchers consider gold to be a speculative asset. The reason gold prices go up is because gold prices are going up. In other words…the reason people buy gold is because other people are buying gold. People are essentially gambling, and buying into the herd mentality that causes speculative bubbles to form in assets.

Ultimately…the biggest lesson is if you’re going to invest in gold, you have to be very aware of the meta-game that is going on. Investing successfully in gold requires a thorough understanding of how people tend to behave in different investing environments. What makes this difficult is that you also have to know how people behave in regards to buying gold when they perceive that environment is changing, as is the case now. If you can do that, then you might stand a chance.



January 2, 2021 Update: We have just announced our BEST STOCK NEWSLETTER of 2020 AWARD!

CLICK HERE to find out which stock newsletter was up 78% in 2020 (and whose 2019 picks are now up 113%).

*** Our Award for BEST STOCK NEWSLETTER of 2020 ALERT ***

Updated January 2, 2021

At WallStreetSurvivor, we subscribe to dozens stock recommendation and advisory newsletters. There is ONE newsletter that is constantly outperforming all of the others--The Motley Fool Stock Advisor.

Five of their 2020 stock picks have doubled and the average return of all 24 of their stock picks for 2020 is up 78%!

We have been tracking ALL of the Motley Fool stock picks since January 2016. That's 5 years and 120 stock picks. As of Friday, January 1, 2021 the Motley Fool's January stock pick (TSLA) is up 720%, their March pick (ZM) is up 172%, their April pick of SHOP is up 226% and their June pick CRWD is up 120%; and another two have more than doubled. In addition, 10 of their 2019, 12 of their 2018, 11 of their 2017, 15 of their 2016. Most impressively, over the last 5 years that we have been tracking every recommendation, their average stock pick is up 209%--tht means over the last 5 years their stock picks, on average, have TRIPLED!

Now no one can guarantee that their next picks will be as strong, but our 5 years of experience has been super-profitable. The important thing about the Fool stock picks is you have to buy them the day they are recommended because they usually pop 5-10% in the first 72 hours after the release their recommendation. You sure don’t want to risk missing out on their next pick.

Normally the Fool service is priced at $199 per year but they are currently offering a NEW SUBSCRIBER DISCOUNT that allows you to get theiir next 24 stock picks for just $99/year. HERE is the LINK to visit their New Subscriber Discount page.

CLICK HERE to get access to all The Motley Fool’s Stock Picks and their next 12 months of picks for just $99 per Year! 



Robinhood was the first brokerage site to NOT charge commissions when they opened in 2013. They just past 10,000,000 accounts and to celebrate they are offering up to $1,000 in free stock when you open a new account.

Here’s the details: You must click on a special promo link to open your new Robinhood account. Then when you fund your account with at least $10, you will receive one stock valued between $5 and $500. Then, you will get a link to share with your friends. Every time one of your friends opens an account, you will receive another free stock valued between $5 and $500. Click here to learn more about this Special Robinhood offer.

Claim your free stock NOW (before it’s too late)

One response to “In Gold We Trust (But Should we?)”