50 Years Since the US Abandoned the Gold Standard... Long-Term Gold Returns Lower Than Stocks and Bonds

Inflation Hedge Effect Also Shows High Volatility

[Asia Economy Reporter Byunghee Park] On the 15th of this month, it will mark 50 years since the United States abolished the gold standard. The Wall Street Journal (WSJ) reported on the 8th (local time) that after reviewing the past 50 years, gold's function as an inflation hedge is not clear, and its long-term investment returns are lower compared to stocks and bonds.

Former President Richard Nixon halted the broadcast of 'Bonanza,' one of the most popular TV programs at the time, on August 15, 1971, and announced the suspension of the dollar's convertibility into gold. Before Nixon's declaration, the U.S. exchanged 1 ounce of gold for 35 dollars.

At that time, the U.S. was running a financial deficit while conducting the Vietnam War. The issuance of dollars increased significantly, and countries holding U.S. Treasury bonds, concerned about the dollar's depreciation, repeatedly demanded to exchange dollars for gold. The U.S. gold reserves rapidly decreased. As the gold reserves dwindled and the risk of default increased, President Nixon declared that the dollar would no longer be convertible into gold.

After the U.S. abolished the gold standard, prices soared for several years, and gold prices also rose. Despite rising prices, gold maintained its value, highlighting its appeal as an inflation hedge.

Gold Futures Price Trends on the New York Mercantile Exchange [Image Source= Bloomberg]

However, according to research by Campbell Harvey and Claude Erb of Duke University, gold serves as an inflation hedge only from a long-term perspective. The long-term period referred to by Professors Harvey and Erb means over a century. In the short term, gold shows price volatility similar to other assets. In fact, there were several instances when gold prices fell even as U.S. inflation surged. When U.S. inflation approached 25% in 1975, gold prices actually declined, and the same occurred when inflation hit 12% in 1981.

Over the past 50 years, the correlation between the U.S. Consumer Price Index (CPI) and gold prices has shown high volatility ranging from 1 to 8.4. A higher number means gold prices rise more in line with the CPI. The recent correlation index between CPI and gold prices is 6.5, nearly double the 50-year average of 3.6.

Gold's investment returns are also less attractive compared to other assets. Gold prices have increased 50-fold since 1971. However, its long-term returns do not match those of stocks. The S&P 500 index has had an average annual return of 11.2% since 1971, while gold's return is only 8.2%.

Moreover, the 8.2% return is heavily influenced by the significant rise in gold prices during the first 10 years after the announcement of the gold convertibility suspension. Excluding the initial 10 years, the average annual return of gold over the past 40 years drops sharply to 3.6%. During the same period, the S&P 500 index recorded 12.2%, and U.S. bonds yielded 8.2% returns.

Since gold's function as an inflation hedge is unclear and its long-term investment returns are unattractive, WSJ assessed that the outlook for the next 50 years is not optimistic. In particular, Professor Harvey stated, "With the emergence of cryptocurrencies, gold is facing unprecedented challenges."

Cryptocurrencies, including Bitcoin, were praised as digital gold this year, causing their prices to surge. However, amid the recent global inflation surge, Bitcoin prices have fallen, increasing skepticism about Bitcoin. Jerome Powell, Chairman of the U.S. Federal Reserve, and Christine Lagarde, President of the European Central Bank (ECB), have both downplayed cryptocurrencies, calling them merely speculative instruments.

This content was produced with the assistance of AI translation services.