What is the scope of research on gold as an investment? In their July 2015 paper entitled “The Financial Economics of Gold – A Survey”, Fergal O’Connor, Brian Lucey, Jonathan Batten and Dirk Baur review the body of formal research on gold from the perspective of an investor. They start with the following background topics: how gold markets operate; physical gold demand and supply; and, gold mine economics. They then address gold as an investment as follows: portfolio diversification with gold; gold as a safe haven; gold in comparison to other precious metals; relationships between gold and currencies; mining stocks and exchange-traded funds (ETF) as gold substitutes; interaction of gold and oil; gold market efficiency; gold price bubbles, interactions of gold with inflation and interest rates; and, behavioral aspects of gold investing. They note consistencies and inconsistencies of research findings within topics. In reviewing this body of research, they note that:
- The volume of gold research tends to mirror the gold price trend. Hence, there is considerable research from the last two decades.
- The total value of the gold stock is comparable to the capitalizations of major stock markets, with turnover suggesting similar liquidity.
- The annual supply of new gold is only about 1% of the existing stock. Once found, little gold is lost.
- Gold is unique as an investment, distinguished even from other precious metals because of its relatively low industrial usefulness.
- Beginning in 2003, ETFs facilitated gold trading for many investors, arguably driving gold price upward to a peak in 2012. This increase in speculative gold trading may have altered its investment behaviors.
- Central banks became net buyers of gold again in 2010 for the first time since the 1980s.
In summary, there is considerable research on gold as an investment from the last two decades. Changes in the gold market may confound older findings.
The paper is largely a summary of findings from many studies of different vintages. The authors offer few overarching observations.
For a another overview of gold as an investment, see “Future of the Price of Gold”.
