Just like in 2011, when the last gold rally took place, Claude Erb and Campbell Harvey warn investors not to get carried away by their enthusiasm for gold.
Before I go any further, I should probably make two disclosures:
- I have been a long-term investor in gold. I started investing in it between 2006 and 2007, when the price was in the $500/oz range. and $800/oz. And although I sold my holdings in gold ETFs when I bought my house in London ten years ago, I still own physical gold.
I have a mild case of PTSD from Erb and Harvey’s previous papers gold And raw materials. I’ll spare you the details, but between 2007 and 2009 I was on a mission to convince colleagues at the company I worked for at the time to include gold and commodities in their multi-asset portfolios. My colleagues used the working paper version of these articles by Erb and Harvey to argue that gold and commodities should not be part of a well-diversified portfolio. The discussions became so heated that our bosses had to intervene and tell us to shut up and move on.
In their new article, Erb and Harvey make basically the same arguments as they did more than a decade ago. First, they show that gold is a poor inflation hedge. Over the very long term (although that could take a very long time, as I’ll discuss tomorrow), gold managed to keep up with inflation. Yet, even over investment periods of up to ten years and longer, gold often failed to hedge against inflation. That pours a bucket of ice water on the current story that the gold price is rising because people fear that inflation in the US will rise.
Gold vs inflation
Source: Erb and Harvey (2025)
Ultimately, the price of gold is determined by supply and demand of the physical metal. What has changed, they say, over the past 25 years is that we’ve seen a new source of stable demand enter the market: gold ETFs. The chart below shows that the gold price has been structurally higher over the past 25 years since the introduction of gold ETFs.
The price of gold and the demand for ETFs
Source: Erb and Harvey (2025)
Which brings us to the obvious question: why would gold continue to rise, given that the price of gold is so high?
Erb and Harvey see no reason other than one. They argue that if regulatory reforms for commercial banks allowed them to hold gold as reserves, it could unleash a huge amount of new demand that could push gold prices permanently higher. They argue that central banks are not only allowed to hold gold as reserves, but that they are also allowed to do so in significant quantities. But commercial banks are currently not allowed to treat their gold holdings as reserves. Of course, this has historical reasons, because paper money was tied to the price of gold, so central banks demanded a monopoly on owning gold as a reserve to prevent commercial banks from printing their own money. But the days of the gold standard are long gone. Erb and Harvey argue that it is inconsistent that central banks can hold gold reserves, but commercial banks cannot.
Yeah, that doesn’t convince me. When have accounting rules or regulations ever been consistent?
Anyway, if you assume this isn’t going to happen, then we’re back to the old graph that Erb and Harvey have been showing for years: the relationship between the price of gold and its future real return. The chart below also shows the price of gold at the time the article was written in March 2025. Obviously we’re in a slightly different price range now, but I’m sure you can mentally adjust the chart if you need to.
Gold price and future real return on gold
Source: Erb and Harvey (2025)
#Erb #Harvey