Campbel Harvey, Professor of Finance, Fuqua School of Business, Duke University
Mar 31, 2025
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Campbel Harvey, a renowned Professor of Finance at Duke University and Partner at Research Affiliates, shares his insights on gold as an investment. He discusses his research on gold's performance compared to inflation, highlighting its volatility. Harvey explains the influence of ETFs and central banks on gold prices and the importance of entry price for investment returns. His work underscores gold's resilience during market downturns, making a case for its role in modern investment portfolios.
Gold has outperformed inflation in the last two decades, yet its volatility challenges its reliability as a consistent inflation hedge.
The entry price of gold significantly influences future returns, requiring investors to be cautious during periods of substantial price rallies.
Deep dives
Gold as an Inflation Hedge
Gold has been viewed as an inflation hedge, but its volatility makes it an unreliable one. Over the past 20 years, gold has outperformed inflation, suggesting it has fulfilled this role during that period. However, its volatility is comparable to that of the S&P 500, making it difficult to use gold as a consistent hedge against inflation, which has much lower volatility. Historical data reveals that, at times, gold has underperformed inflation, emphasizing that while it can serve as a protective asset, it should not be solely relied upon for this purpose.
The Impact of Entry Prices
The entry price for gold significantly influences its future return potential, following a trend common in financial assets. When gold trades above its historical fair value, subsequent returns have historically trended lower, as seen in past data where high real prices led to modest or negative returns. Investors should be cautious during periods of substantial price rallies, as this may foreshadow a correction. Understanding the relationship between entry prices and future performance is crucial for investors considering gold as part of their portfolio.
The Role of Demand Drivers
Several factors have driven recent demand for gold, particularly financialization and geopolitical uncertainties. Financialization has made gold more accessible to both retail and institutional investors, significantly increasing demand and pushing prices upward. Additionally, countries like China are actively accumulating gold reserves to reduce reliance on the U.S. dollar amid geopolitical tensions, which further supports price growth. This interplay of limited supply and increasing demand indicates that while gold may present opportunities, investors should remain mindful of its associated risks.
Best known for his seminal work on the information content of the US Treasury yield curve nearly 4 decades ago, Campbell Harvey has produced meaningful academic research in all corners of empirical finance. In this episode of the Alpha Exchange, I caught up with Campbell, now a Professor of Finance at Duke and Partner at Research Affiliates, on his recent work on gold, an asset near and dear to me. We discuss his piece “Is There Still a Golden Dilemma?", with Claude Erb that updates work they did back in 2013 on the yellow metal.
Our conversation explores the financial properties of gold, with emphasis on its capacity to hold its purchasing power and to help defend against equity market drawdowns. On the first, Campbell makes the point that over the past two decades, gold has easily outperformed inflation. He adds, however, that gold is considerably more volatile than inflation is. Thus, there are periods when gold can also underperform inflation. On the equity drawdown front, Campbell’s work shows that, while not an explicit hedge like an S&P 500 put option is, gold has proven durable during risk-off periods.
We move to the drivers of the gold price and here Campbell discusses the role of both ETFs and Central Banks. Lastly, and importantly, Campbell’s work shows that entry price matters. When the price of gold deviates from fair value, the forward return profile tends to be worse. Today’s substantial rally may easily continue, but investors must be mindful of the risks of buying at extended levels.
I hope you enjoy this episode of the Alpha Exchange, my conversation with Campbell Harvey.
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