Say what? Gold isn't a good hedge against economic crashes, study says

Jessica Morris
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Gold price volatility has increased over time (Source: Getty)

Anyone who snapped up gold to weather the recent market turmoil might want to stop reading now.

New research suggests that the precious metal's widespread reputation as a safe-haven is not entirely correct. In fact, it's actually a poor punt for investors who want to protect their portfolios from economic meltdowns and stock market sell-offs.

It comes just weeks after Britain's vote to leave the European Union sent gold prices surging. Meanwhile, a number of investment banks, including the likes of HSBC, Credit Suisse and Societe Generale, are all bullish on bullion.

Read more: Investors hold the gold as risk-appetite goes cold

But Professors Robert Barro and Sanjay Misra's study entitled "gold returns", which is set to be published in the Economic Journal, challenges this. It found no significant relationship between the performance of US gold and economic growth or stock returns.

"A true hedge would display significantly negative correlation with growth rates of real per capita gross domestic product and real stock returns. But this study finds that these variables have a correlation of essentially zero with US real gold returns," they said.

The finding was backed up by how gold fared in some of the world's worst macoeconomic disasters — which the research defined as periods when a country's average income per person tumbled by 10 per cent or more.

While gold prices had an average annual growth rate of 1.5 per cent from 1880, incidences of economic calamity increased that figure only “negligibly” to 2.1 per cent. Moreover, gold actually lost value in over half of these incidents.

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So where did gold's seemingly undeserved reputation come from? It could be due to bullion's increased volatility following changes to its role in the US financial system.

From 1880 to the start of WW1 the US dollar could be freely converted into gold. This was followed by a transition period featuring different forms of gold standard, before the unsatisfactory system was completely abandoned in 1971.

"Because of the near disconnect between gold and monetary systems since the 1970s, the volatility of real gold returns has become particularly high since that time," the researchers said.

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