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May 15, 2015

Should Investors Hold Gold?

Sponsored Content provided by Robert Burrus - Dean , Cameron School of Business - University of North Carolina Wilmington

This Insights features Dr. Cetin Ciner, the resident gold expert at UNC Wilmington’s Cameron School of Business and professor in the economics and finance department.

Pricing gold is difficult. On the one hand, gold used be at the heart of the international monetary system. Gold coins were used as money, first in ancient Lydia by King Croesus in what is now Turkey, and later as a reserve asset to ensure the value of paper currencies under the International Gold Standard.

On the other hand, the link between the U.S. dollar and gold has long been severed, specifically when President Nixon ended the Bretton Woods Agreement in the early 1970s. Since then, the U.S. dollar has been printed and been in circulation without any official link to gold or any other reserve asset. The paper money now functions only on the faith of citizens that the U.S. Treasury will protect the value of their currency.

Still, gold has kept its allure in finance to a large extent. A part of it is simply due to history and myth. Gold has entered into our consciousness as an important symbol. Gold is the ultimate prize in competitions; a gold credit card is better than ordinary ones; a heart of gold is in only the nicest person. Also, central banks, especially those of emerging markets, continue to increase the gold content in their reserves even though they do not earn interest on their gold holdings.

This is an important point to note. The fact that one cannot expect to earn interest, dividends or any other income stream from owning gold means that it cannot be considered as an investment, such as buying shares of Ford Motor Company, which are claims against real assets in the economy. In fact, purchasing gold for “investment” is fundamentally flawed since one could only obtain a profit by selling it at a higher price, which is the definition of “speculation.” In other words, gold has no intrinsic value.

So why would anyone own gold? The answer lies in my opinion in the point raised above. Paper currencies now rely only on the faith in the government, and its promise to keep the purchasing power of the currency. Gold has always had characteristics of true money. It is durable, divisible, convenient and consistent around the world so that everyone will recognize a gold coin. Most importantly, it cannot be created out of air, which is the primary risk with paper money. Our current system gives the government the ability to inflate money supply without any limit. Therein you will find the answer to the question of whether one should hold gold. It depends on the faith of an investor in our government. If one holds the viewpoint that there is a significant chance that government will not maintain its implicit promise to society not to debase the paper currency, but instead that it will print too much of it to finance its own activities, then holding gold would be warranted. Gold would serve as an insurance policy if this risk indeed materialized, and would shine as the globally recognized true money.

For 2014-2015, Dr. Robert T. Burrus, Jr. will serve as interim Dean of the Cameron School of Business at the University of North Carolina Wilmington. Before taking on the role of interim Dean, Burrus was the department chair for economics and finance and a professor of economics. He has been on Cameron’s faculty since 1998. The Cameron School of Business has 90 full-time faculty members and 29 administrative and staff members. The school hosts approximately 2,000 undergraduate students and 170 graduate students. International students come to study at Cameron from all over the world. The Cameron School of Business is AACSB accredited; offers capstone experiences; houses a Financial Trading Markets Room; provides for overseas learning opportunities; and is a founding member of the Trans-Atlantic Business School Alliance. To learn more about the Cameron School of Business, please visit Questions and comments can be sent to [email protected].

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