Week 17 Day 1: Gold Produces Nothing

Warren Buffett's famous comparison: if you took all the gold in the world, it would form a cube about 68 feet per side. Worth about $12 trillion. For the same money, you could buy all U.S. cropland, plus 16 Exxon Mobils, and still have $1 trillion left. The farmland produces food. The companies produce goods and profits. The gold cube just sits there and looks shiny.

Since 1971 (when Nixon ended the gold standard), gold has returned approximately 7.7% annually in nominal terms (about 3.5% real). The S&P 500 has returned approximately 10.8% annually (about 7.5% real). Over 50 years, $10,000 in gold became approximately $430,000. In the S&P 500: approximately $2,000,000. The S&P 500 won by nearly 5x. Gold had its moments: 1971-1980 (inflation surge, gold up 1,300%), 2000-2011 (financial crises, gold up 500%). But it also had devastating decades: 1980-2000 (gold fell 70% in real terms while the S&P 500 rose 1,100%). The core problem: gold's return depends entirely on what other people are willing to pay. Stocks return comes from actual business earnings that grow over time. Gold is a speculation on fear. Stocks are a claim on human productivity.

Gold's real return over very long periods is approximately 0-1%. Erb and Harvey's 2013 paper 'The Golden Dilemma' demonstrated that gold has roughly maintained its purchasing power over centuries (an ounce of gold bought a fine Roman toga in 200 AD and a fine men's suit today) but has not produced real growth. The explanation: gold is not a productive asset under the Fama-French framework. It generates no cash flows, so its expected real return should be approximately zero (reflecting only storage costs and convenience yield). Gold's appeal as an 'inflation hedge' is empirically weak over periods shorter than a century. Using rolling 5-year correlations, gold's correlation with CPI inflation has been near zero since the 1990s. Gold is more accurately described as a crisis hedge (performing well during systemic financial stress, currency crises, and geopolitical instability). Its 2020-2024 surge above $2,000/oz coincided with pandemic spending, inflation fears, de-dollarization by central banks (China, Russia, India collectively adding hundreds of tons), and geopolitical tensions. For portfolio construction, a small gold allocation (5-10%) can improve risk-adjusted returns through diversification benefits (low correlation with both stocks and bonds), but large allocations create significant expected return drag.