TWO PERENNIAL GOLDEN DILEMMAS: SHOULD GOLD BE A PART OF AN INVESTOR'S PORTFOLIO? SHOULD THE U.S. RETURN TO THE GOLD STANDARD?

Abstract

ABSTRACT Many investment advisors write about gold in the print media or talk about it when they appear on TV channels dedicated to the news of financial markets. The major part of this paper is devoted to a study of the gyrations in the price of gold and its correlation with the S&P 500 Index. The paper finds empirical evidence that in times of crises, investors think of gold as a safe-haven real asset and pour money into gold, driving up its price beyond reason or limits. When stability returns to the stock markets, they abandon gold and start buying paper assets, thereby causing a steep decline in its price. The annual return from gold on a long-term basis is found to be about 7.6%, but highly volatile. Of course, gold has been used as currency in trade transactions since ancient times. Do these facts justify our interest in gold as an investment vehicle? And, do they support the argument of some economists (and some politicians as well) that the U.S. should return to the gold standard and fix the value of the paper currency (the U.S. dollar bill) in terms of gold? Obviously, the answer to the first question is that it depends on the circumstances of the individual investor and sometimes it may be worthwhile to include gold as a part of a well-diversified portfolio. The answer to the second question is that it is very unlikely that the U.S. will ever return to the gold standard. Keywords Investing in gold, diversified portfolio, gyrations in gold price, gold standard