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Is gold a good investment?
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Real rates are the driver of gold

Gold's performance is not tied to the level of inflation but the level of real interest rates. This goes contrary to what many thought and is called Gibson's Paradox. When real rates are positive, gold does poorly. When real rates are negative, gold does well.
Gibson's Paradox Gold Inflation Interest Rates Real Rates

The Argument

In the past, gold was strictly for ornamental use due to its brilliance, color, and the ease of which it could be shaped. In the modern era, it’s considered an extremely versatile metal with many applications across technology and aerospace, making it not just pretty but important. The price of gold is rather high, partially due to its rarity and in part due to the effort it takes to process it. However, the gold rate increases and decreases with supply and demand.[1] As the supply decreases the price increases and vice versa. The same relationship exists for its interest rate. Since gold is considered a safe investment when interests rates are down, people try to place their money in something stable, such as gold.[2] When playing the market you have to be careful, so gold is a stable investment.

Counter arguments

Acquiring and harvesting of gold is not a cheap process. [3]While there are gold veins and gold deposits all around, actually acquiring that gold takes time. The process of extracting the gold from the rocks is also labor-intensive and time-consuming. This is one of the things that drive up the rate of gold but being good or bad solely relies on the method of how it’s acquired. The problem doesn’t lie in the actual process but the people who do this process. Is the labor fair, is the method destructive, is the nature around these mines preserved or destroyed in the process? These are the questions to ask, and their answers define whether gold is good or bad.



[P1] Gold's worth is effected by interest rates.

Rejecting the premises

Further Reading

The key paper on Gibson's Paradox is here. Here is a good read on the arguments in favor or against Gold.


This page was last edited on Monday, 23 Nov 2020 at 12:00 UTC

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