GOLD

Gold—The Simple Facts

Nicholas J. Johnson, Mihir P. Worah

When it comes to gold, investors often see the world in black and white. Some believe it to be a useless, barbarous relic with no yield. Others see it as the only asset that can offer protection from financial catastrophe.

The authors provide a balanced framework for assessing value. The bottom line: given current valuations and central bank policies, see gold is a compelling inflation hedge and store of value that is potentially superior to fiat currencies. For centuries, gold has maintained its real value even as currencies have come and gone.

Investors should consider allocating gold and other precious metals to a diversified investment portfolio. The supply of gold is constrained, and demand will increase. The Fed’s decision to continue quantitative easing makes gold even more attractive.

The Fed’s actions are a paradigm shift; it is attempting to ease financial conditions and encourage risk-taking by increasing inflation expectations. Its policies will likely result in continuous negative real interest rates because nominal rates will be fixed at close to 0% for the foreseeable future.

Up for discussion: gold’s remarkable history as a store of value and medium of exchange; the real price of gold; and how gold, to the Chinese, has never seemed less expensive.

source: pimco