If history repeats itself, investors won’t buy their inflation hedge by investing in gold—nor will shoppers, by buying gold bars at Costco.

Professor Campbell Harvey of Duke University’s Fuqua School of Business said the idea that gold keeps its purchasing power, shielding the owner of bars or jewelry from the devaluating effect of rising prices, is only true over long stretches of time.

“Gold is far too volatile,” he said. “It may have been an effective hedge over centuries or millennia, but not over the next 10 years.”

In a new paper titled “Is There Still a Golden Dilemma?” Harvey and co-author Claude Erb use the example of a Roman centurion who was paid 38.58 ounces of gold two millennia ago.

“At today’s price of gold, it would be $86,300, which is very close to the salary of a U.S. Army captain with six years of experience—$85,600,” Harvey said.

But for investors who add gold in their portfolio today, with high inflation and gold prices close to an all-time high, the expectation that gold will keep its real value in the next 10 years is not consistent with history, he said.

“When gold is at an all-time high, the expected returns over the next 10 years—according to historical experience—is very low,” Harvey said.

The Golden Dilemma

Many institutional investors—banks, mutual and hedge funds, insurance companies and endowments—have an investment category called “inflation protect,” Harvey said, a bucket where they keep assets like land, inflation-protected bonds, and often gold.

However, the history of gold prices since the asset became easily tradable again in 1975—after getting outlawed from trade by the U.S. President Franklin Delano Roosevelt in 1933—shows not only a high volatility of gold prices, but also no correlation with inflation rates over 10-year spans, Harvey said.

“Gold is about as volatile as the S&P 500,” he said, “and much more volatile than inflation. People would not think of the S&P 500 as a short-term inflation hedge.”

So, for investors chasing returns, what has always been thought as a “golden constant” may rather play out as a “golden dilemma”: Is the current high price of gold bound to fall, as history suggests, or are there new factors that will keep high gold prices permanently high? Harvey explained history may not repeat itself and circumstances can change.

Are factors pushing gold to permanently higher prices?

The launch of gold exchange-traded funds (ETFs) in 2005 represents one of the major changes in the structure of gold investment.

ETFs are funds that collect money from investors to buy gold and securely vault it. Investors own shares of an ETF, and the value of their shares follows the price of gold.

Before the launch of gold ETFs, investing in gold was complicated, Harvey explained, because storing gold safely is costly. With gold ETFs, investors can now gain exposure to gold without the burden of storing it.

The advent of gold ETFs, the researchers show, has increased the demand of gold since 2005, and may be one of the reasons behind the rise in gold prices since then.

More recently, a second main driver of gold demand may be found in China’s de-dollarization attempt, the researchers write. At the 2023 BRICS Summit, Chinese President Xi Jinping invoked the need for a “reform of the international financial and monetary system,” focused on alternatives to the dollar as the international reserve currency. And even though the 2023 summit didn’t end with a specific agreement, available data shows that the People’s Bank of China has been steadily accumulating gold in the last two years.

However, as is the general case with gold, the quality of the available data is a challenge.

“Is China fully revealing the extent of their gold holdings? Nobody really knows,” Harvey said.

Buy high and sell low?

Harvey concluded it is hard to say whether the demand shocks from gold ETFs and from countries seeking dollar alternatives have permanently changed gold’s historic dynamics.

The general insight of history is that gold is not a reliable inflation hedge over the short and medium term because it fluctuates wildly, he said, and its expected returns when its price is high are “very low.”

“However, sometimes investors tend to buy high and sell low, which is the opposite of what I tell my students,” Harvey said. “When prices go up, some investors tend to join the bandwagon.”

Harvey points to the famous Warren Buffett quote when talking about gold: “As bandwagon investors join any party, they create their own truth—for a while.”

Harvey suggested that investors “should think twice.”