A debate with Campbell Harvey
Gold $5,000? by Campbell Harvey of Research Affiliates, 4/24/25
Campbell Harvey is an eminent economist, associated with one of my favorite financial indicators, the yield curve. Among other things, he developed the idea that the yield curve conveys important information about the likely course of the economy and financial markets.
In the linked piece, he addresses gold, in particular its history, likely evolution, and value as a portfolio inflation hedge. The article contains some valuable perspective, but here I want to focus on some specific points of disagreement. Not that they ‘re unique to Prof Harvey’s analysis … I’m highlighting these flaws because they’re widely shared in conventional economics.
“Gold is often viewed as a hedge against inflation, but historical evidence shows that its high volatility makes it an unreliable short-term inflation hedge.”This invokes an arbitrary absolute standard. The more realistic question would be “how does gold rank among assets as a short term inflation hedge?” Unless one can cite a better example, whatever its imperfections, gold is the best short term inflation hedge known. In which case any criticism of its merits rings hollow at best.
“… Even on an inflation-adjusted basis, gold achieved an all-time high.”Further reading does not support this claim. The data cited indicate Dr Harvey means on a CPI-adjusted basis.
“Importantly, gold is classified as a financial asset by the Bureau of Economic Analysis (BEA) – gold is not a “good”.”Yet when asking whether gold is a good “inflation hedge”, Dr Harvey chooses consumer goods as a standard of comparison. If gold is a financial asset, why would one exclude financial assets from one’s measure of inflation, that is, compare it to everything but its peers?
“So, given these forces and their role in gold’s current elevated price, how safe is gold as a safe haven asset? That’s the critical question in navigating current markets and requires an examination of history.”“Safe haven” is a frequently used but vague and amorphous financial colloquialism. Safe from what peril? Loss in dollar terms? Loss of long term purchasing power? Different assets would rate much differently depending on what criterion of safety you choose.
Furthermore, the notion of “a” safe haven asset is fundamentally flawed. There are no assets that are safe taken alone. The principle of diversification says safety is only found in combinations of assets.
“An important point to remember: Gold’s reputation does not always align with reality. The notion of gold as an inflation hedge, for example, may not be as ironclad as some believe. With his concept of the “Golden Constant,” Roy W. Jastram (1978) sought to demonstrate that gold’s purchasing power, its “operational wealth,” as he put it, was more or less unchanging over time, in a sense, immune to inflation. Whatever a particular amount of gold could buy 2,000 years ago was about as much as the same amount could buy today.I revisited Jastram’s work in “The Golden Dilemma” (2013) with Claude B. Erb. We validated Jastram’s thesis that the real price of gold was approximately constant over millennia. We calculated how much Roman centurions were paid in gold 2,000 years ago. Their wage in gold, when converted into dollars, closely matched that of a U.S. Army captain today.
However, investors don’t have horizons of millennia or even centuries. Erb and I show that over shorter horizons gold is a highly unreliable inflation hedge. The reason is simple: Gold is volatile and has about as much return volatility as the S&P 500. Inflation rates are not so volatile; inflation’s volatility is less than 2% on an annualized basis.”
This fascinating line of inquiry is marred by a couple flaws. Dr Harvey is correct that gold can return losses over a significant portion of an investor’s career, but that is true of any asset … stocks are often promoted on the questionable grounds of long term past performance, but have underperformed gold so far this century … a long time for any investor to be in an underperforming asset. The argument also apparently assumes “inflation” is identical to that quantity measured by the US CPI. There is no support for this premise, however. We’re well aware that it is a commonly made assumption, but that’s the economic equivalent of when the parent asks the child; “Would you jump off of a cliff just because your friends are doing it?”
Scientific progress comes in questioning conventional wisdom. As when Galileo questioned the conventional assumption that the Sun revolves around the Earth; had science been content to merely carry on with that assumption, it’s hard to imagine anything like the scientific and technological progress made since.
The bottom line for analysis purposes though is simple: No matter how sound the logical deduction process, if even one premise is unsupported, then the conclusion must be as well. The conclusion that gold is a “highly unreliable inflation hedge” therefore lacks support.
There is another substantial flaw in this argument. It is the tacit assumption that to have value as an inflation hedge, an asset must do the job all by itself. What if, for example, adding gold to a portfolio of stocks improved its reliability as an inflation hedge? In fact, Dr Harvey’s analysis supports this notion.
“The difference in the volatility of gold and inflation is starkly represented in Figure 3, which compares 10-year gold returns with the 10-year inflation rate. The sample starts in 1975, when U.S. investors were once again permitted to own and trade gold following the enactment of Public Law 93-373.3 The blue line represents the inflation rate, the CPI, which the real and nominal prices of gold should have tracked—assuming gold is a perfect inflation hedge. But, in fact, gold prices indicate little if any correlation to the 10-year inflation rate.”“Again, we lack support for the identity of “the inflation rate, the CPI”. What if consumer prices respond to inflation only with a lag? The example of the post covid episode comes to mind, when monetary inflation surged in early 2020 but consumer prices burgeoned in 2021-2022. Gold responded to inflation, not consumer prices.
“In the recent 20-year period, gold generally outperformed inflation and was thus a good hedge. But in the 20 years before, gold underperformed inflation and so was a poor hedge. …”But over the entire 40 year period, stocks+gold was a more reliable inflation hedge than merely stocks. If the addition of gold to a stocks portfolio improved its performance as an inflation hedge, a sweeping conclusion to the effect that gold is a poor inflation hedge is in an artificial context and misleading. Few people hold a portfolio of only gold. The far more realistic question is whether its addition to a portfolio of other assets improves the portfolio’s inflation hedging performance. One such possibility would be in replacing part of the bond allocation in a traditional 60:40 portfolio.
“In the end, gold has a long history as a hedging asset with consistently low correlation to the stock market. But expectations must be tempered. Gold is as volatile as the stock market. That means that we cannot always count on gold to do the job.”Correction: We cannot always count on gold alone to do the job. The implicit assumption that people construct one-asset portfolios stacks the deck against whatever is under examination.
We also need to question whether “hedging” is the only possible portfolio utility of gold. What if gold were one’s default asset? Then one might study whether adding stocks and bonds might be useful in “hedging” against drawdowns in gold!
Getting the right answers so depends on asking the right questions!
Yet Dr Harvey has a valid and important point if it is that gold is richly valued at these levels. We can compare gold with its peers; and such comparisons show it to be in the upper range of historical valuations. One such comparison is with another elementary commodity, copper:
Gold in terms of copper, natural log.When gold reaches $5000, it could well be due more to depreciation of the dollar than to appreciation of gold.
In light of valuations, prospective returns from other elementary commodities may be higher than gold. Besides copper, there’s lithium, aluminum, uranium, platinum, silver, iron, nickel, etc. The tradeoff is that gold is singularly minimally correlated with stocks, so other physical commodities may have less diversifying power. Fortunately investors aren’t forced into an either-or choice; it’s possible to own both gold and other commodities.
To think of Gold in such a limited way without all the Geo-political as well as economic history wrapped up is wrong. There are so many other factors to consider, such as what happens if the 3rd World (fast becoming 1st world) peoples start to buy into Gold with their new found wealth?
India?……..they love Gold & they are starting to gain real wealth very quickly now.
If the Far East & Africa & South America all go for Gold with new found wealth then Gold in $ or £ terms will quickly rocket.
Gold is truth, Gold is honest. Gold is 2+2=4 ……..Gold sh1ts on all the War Mungers, War suddenly COSTS! Gold also sh1ts on Welfare Queens & the low political scum who want to buy their votes….Golds a hero……………Golds a champ……i love Gold.
For sure we don’t want to look at it in any one limited way. Looking at investing from multiple points of view was one of Charlie Munger’s secrets of success:
Charlie Munger’s Mental Models
That’s why we’ve been looking at fundamentals, valuations, technicals, historic, geopolitic … everything in our tool kit. One of these things may prevail, and we won’t necessarily know which until it’s under way, at which point being aware of the factors can help identify it when it’s gaining traction. Heck, all of them will probably be at work at one time or another in the next several years.
I think we’ve hit all the majors in the last few weeks, but if there are any we’ve missed, anyone, please speak up!
Mega’s Dispatch from England;- Going fast no where
Ah sad days the Pope has past. While not a member of his team i do respect what the man tried to do. He had managed to steady the ship after the child abuse came out. He also did much to help many things………..God be with you.
Sadly his passing was used to full advantage the Western scum. We had the meeting between the Green goblin & Trump & oh boy is the limey press going for it. We don’t know what was said but the press are in full chat with headlines like “Even in death the pope brings peace” or “Trumps comes to Jesus moment” …………..
In other words they having a wettest of wet dreams that Trump will come riding to rescue. Trump has made a few tusk remarks about Putin but nothing more…………but a salivating flood of “We knew Putin was evil along” crap is flowing unchecked. you can sense the mixture of joy & relief, like a group of crack heads whom finally get to score for the night.
The picture however is far more complex than that.
Trump is in 3 major wars, Russia/Iran/China he can’t fight all 3 at once, throw in Sudan as an ongoing side show as well………….none are going well.
Russia is winning, China HAS won & Iran is ongoing.
The massive tec advantage of the US has been eroded over the last 20 years, its whip hand gone. ………………i expect a period now of little moment on anything much, the only exception would be Pakistan v India.
Looing at the shipping i fully expect shortages in the summer of some items.
Also totally missed was the Chinese motor show it was a shocker!
China has gone from backwater to main market in just a few years & Home spun is leaving Western products DEAD.
The big news is they about ready to mass produce Soild state battery cars. The most powerful NNC battery tec at present is 270 wh/kg ish……..SSB’s should be north of 400!
I yet to see how many cycles they run (Western prototypes can only manage 600 ish) but if they can match NNC (1100 ish) then its bad news for the West.
The CCP has already told its battery producers NOT to make these battery types outside of China for fear of the West sussing out how to make them. It funny, the CIA funded Tesla to make EVs to force Ford/GM etc to follow suit…………& they made China rich in the process.
🙂
Got to go
Mike
Not 100% right but close enough
https://www.zerohedge.com/news/2025-04-26/eruope-precipice
US V China……………Good summing up
https://www.youtube.com/watch?v=-t-WH7GH_e8
Update, it seems that Rome meeting did not go the way the Limey/Frog wanted. Details are limited but as for Trump “come to Jesus moment” this now appears to be wishful thinking.
Trump told Starmer to piss off & when Macron tried to gate crash the “One to one” between Trump & the Green Goblin he was told to beat it!
Trump told GG the facts of life………..next week will be interesting.
Mike
If (& its a big if) he can pull this off he will be legend in US History
https://www.zerohedge.com/political/trump-floats-plan-slash-or-eliminate-income-taxes-millions-using-bonanza-tariff-cash
I think this has been the big picture plan:
https://financology.net/2025/04/02/todays-tariff-announcement/#comment-4731
The federal government was financed almost entirely with tariffs and duties before the income tax was instituted in 1913, and Trump has spoken in favor of the idea. But just cutting income tax rates won’t cut it. You either pull the weeds out by the roots or they grow back.
The odds of pulling it off in the remainder of his term are next to nothing. It would require congressional legislation … sure not something Trump could do on his own. And I’m afraid his spastic and confrontational approach has left tariffs with a bad aftertaste and burnt up a lot of political capital.
There’s also the matter of the debt and deficits. Debt is already in runaway mode if deficits aren’t cut hard. If he were to stick with his idea of cutting defense spending in half and allow corporate income taxes to revert to pre-TCJA levels, he might get close enough to pull it off. But every indication since has been in the opposite direction … it’s unlikely even meaningful income tax rate cuts could fly without letting a lot of other stuff go.
Big ideas on cutting spending are conspicuous by their absence. Firing federal workers and cutting pay and benefits amount to a drop in the deficit ocean. You’d need entire agencies and programs to go away and stay out of most wars … no sign any of that is about to happen.
One other point … remember the economy was headed into recession and stocks into a bear market anyway. If those perils were somehow dodged you could make the case that Trump’s policies must have prevented it. Not that I think that will happen, but a hopping hostile establishment media will blame everything bad on Trump for the next four years and probably into the hereafter!
What are they hiding?
State of emergency declared in Spain
Spain’s interior ministry has declared a state of emergency after today’s nationwide power blackout.
The ministry added emergency status will be applied in the regions that request it.
So far, Madrid, Andalusia and Extremadura have asked for the central government to take over public order and other functions.
Millions of people across Spain have been affected by the blackouts, as have key industries such as transportation and telecommunications.
Spanish Prime Minister Pedro Sanchez said a “strong oscillation” in the grid is behind the outage, but the cause is still unclear.
Thousands of police deployed as blackout stretches into evening
As the sun sets on Spain, the interior ministry has said it’s deploying 30,000 police officers to maintain security.
They will be deployed nationwide, the ministry added.
Seems they worried about a lot of people “Oscillating strangely” later tonight
Bloomberg is interviewing Cam Harvey about this topic as I type. No indication he’s learned anything from our little debate…
Meantime Canada………………Who going to win?
I think Trump handed the Libs a big win when they were doomed
Ah
https://www.zerohedge.com/geopolitical/spain-hit-massive-really-massive-power-blackout
And the correct question to our Double Jeopardy! answer is: “What happens when politicians and bureaucrats take charge of something that engineers and businessmen used to do?”
The New Gold Story: Who’s Buying, and Why
Lessons for Gold Investors from USDX, Bitcoin and Gold Stocks
Oh Canada!
Carlos bought Gold sometime ago…….now he happy
https://www.youtube.com/watch?v=gKWIm1FITMc
Gold doing about as well as Hilary Clintons run for the White house!
Not terribly surprising gold would take a much needed breather after tagging $3500, per my skepticism of record. But so far the support is impressive; given the extremes of overboughtness the bottom could easily have fallen out by now. There really hasn’t even been a trend break … we had a spike above trend and a dip below it, but since still tracking the previously established trajectory.
Looking good?
Gold Price Forecast: April Peak May Trigger a Sharp Decline in May
The context is there’s still a deflationary undertow in the system. Stocks have recovered some, but don’t seem to have much starch in them. Commodities are weak; copper is rolling over, oil is back below $60. Treasuries have been catching a bid. Rumors of the death of the dollar are greatly exaggerated.
This isn’t the ideal setup for gold to soar. Fed easing could turn that around … gold may have already priced some in … we already had negative PPI and CPI prints but more weak econodata might be needed to overcome its resistance to doing anything it thinks might support Trump. This fundamental backdrop jibes with the technical picture Thorson paints; long term bullish but with the risk of a sharp selloff near term. That would be confirmed by a break of the trend out of December.
Not looking good this morning
It looks intentional. Here’s a sample of typical reporting:
https://www.cnbc.com/2025/04/29/stock-market-today-live-updates.html
“Stocks tumbled on Wednesday, spoiling a stock market comeback in April, as data showed the U.S. economy contracted in the first quarter, raising fears the economy was slipping into a recession under the weight of President Donald Trump’s flurry of policy moves, especially on trade.”
What impression is the reader left with here as to why the economy is sinking into recession? Trump trade policy, right?
But wait … Trump wasn’t even president until part way into the first quarter, and the big trade policy announcement didn’t even come until after the quarter was over. Not to mention the economy doesn’t react instantly to policy changes; it takes time.
Again no mention of one of the longest and deepest yield curve inversions in decades ending just months ago. The economy was already headed for recession. The establishment campaign against Trump that began over eight years ago is still very much alive.
The not-so independent Fed is playing its part. Last fall before the election, when official inflation had stalled well above its own inflated target and markets were floating on a sea of liquidity, it couldn’t wait to ease policy. Now when we’ve just had negative PPI and CPI monthly deltas, a negative quarter of GDP, and markets are crashing, it fiddles like Nero.
It will be dragged kicking and screaming into cutting rates. The bond market has been cutting since Christmas. I still like cash and treasuries here.
You heard it here first!
“*TRADERS FULLY PRICE FOUR QUARTER-POINT FED CUTS BY END-2025
Powell dragged in, kicking and screaming”
https://www.zerohedge.com/markets/cash-king-mark-mobius-says-his-funds-hold-95-cash
But the broader bond market continues to be King of Rates. The fed funds futures market is a specialty more narrowly focused on handicapping probabilities of numbers of cuts. Fed funds futures is the tail to the $37T Treasury market dog.
And the Fed itself lags the market. While the media may be fixated on the Fed, investors are better off following Treasury rates.
https://home.treasury.gov/resource-center/data-chart-center/interest-rates/TextView?type=daily_treasury_yield_curve&field_tdr_date_value_month=202505
https://www.zerohedge.com/commodities/gold-tumbles-near-record-chinese-liquidations
Look out below!
Shine on Silver?
https://www.jpost.com/business-and-innovation/precious-metals/article-852029
Bye bye Mike…………..he waltzed out the door
Japan threatens US!
They dump the $
Thorson has pretty well nailed gold lately … here’s his latest:
https://www.gold-eagle.com/article/gold-price-forecast-april-peak-occurred-right-cycle-schedule
I would add that gold, which generally has a low correlation with stocks, has been even more so lately, especially with US stocks. The correlation has been negative, such that if stocks are down gold is up and vice versa. To the extent this continues, the performance of gold will depend on the performance of stocks. The performance of a stocks+gold allocation has been especially resilient.
“Our Gold Cycle Indicator is at 333 after maxing out in mid-April. Overall, we expect a pullback towards $2,800 over the coming months.”
At a spot price of roughly $3,450, that’s a nearly 20% drop. I haven’t found any solid rules that allow us to somewhat reasonably compute a price for gold as we can price equities but a 20% correction in a few months is quite large and I’m wondering if Thorson is looking at it purely through a crowd movement (people exiting a crowded trade), a recession (perhaps an all assets down event as in 2020 and especially 2008), or some sort of global peace or stability breaking out that restores confidence in currencies (Hah!).
I am still not seeing any assets that are inexpensive enough that would compel me to sell at least some of my gold to deploy the proceeds into an inexpensive asset. Bonds look absolutely terrible (although they may be okay for a trade) and that’s about the only thing on my radar that *looks* inexpensive.
Aye … there are no rules. Taking everything we’ve talked about here into account, I think it’s likely gold trades between $2800-$3000 some time this year. But that would hardly be the end of the world. Or even the bull market. Thorson himself sees it as a stop on the way to $8000; see the note linked here:
https://financology.net/2025/04/25/gold-5000/#comment-5098
The main doubt I have about the sub-3000 dip is that a lot of folks would look at it as a great buying opportunity, and Mr Market tends to be stingy with such coveted gifts;-)
Far as alternatives go, sure, the cap-weighted averages don’t look good. Not that any part of the stock market is a screaming buy, but non-US stocks, especially dividends, quality and value, at least have return prospects justifying the risk. I’ve highlighted some ETFs towards the bottom of the Model Portfolios page. They wouldn’t be immune to a major bear market, but have collectively been outperforming the averages. Again, it’s not total avoidance of downside risk – there’s no such thing as risk-free investing – but making sure the return prospects make it worth while.
Case in point … I’m not selling gold just because I think it’s likely it will dip below $3000 some time this year!
Fortunately we don’t have to choose only one asset to invest in. I like a measured, selective stocks+commodities+treasuries mix, albeit with more gold and less treasuries than might have been appropriate a few years ago. Get the mix right and performance is pretty reliable as the liquidity spigot gets buffeted around from one to another by the headline flow.
Can you still have an all assets down scenario? Not really … 2008 … 2020 … those were cash up events. Prices fall because the pricing unit rises. Total purchasing power of the world’s assets – currencies, bonds, stocks, etc – is pretty steady, because the total goods and services available for purchase is. Cash up (deflation) is rare enough and transient enough not to routinely allocate for, but when, as now, the risk is elevated (yield curve, tight money), cash and short term treasuries cover it.
Gold on the move again … $3378 …
https://www.gold-eagle.com/
$3434.56
Looks like it’s taking another run at $3500. Whether it passes or fails points what happens next…
India v Pakistan baby!
Gold hit $3400!
Mike
It’s like the great Roseanne Roseannadanna said: It’s always something. India-Pakistan war headline, gold shoots up; America-China trade talks headline, buying interest shifts to stocks.
Gotta keep your eye on the long game … spiraling government debt, central bank monetization … higher gold!