It’s hard for many so-called “elite” economists to think about gold as an asset, probably because they’ve devoted so much of their careers to trying to justify fiat money systems. But N. Gregory Mankiw, a somewhat famous Harvard professor and the author of some very popular economics textbooks, grudgingly acknowledged the logic of holding gold in an investment portfolio. In a New York Times editorial, Mankiw wrote of the benefits of gold as a portfolio counterbalance.
An important element of an investment portfolio is diversification, and here is where gold really shines — pun intended — because its price is largely uncorrelated with stocks and bonds. Despite gold’s volatility, adding a little to a standard portfolio can reduce its overall risk.
Mankiw highlighted some other interesting gold facts.
The World Gold Council estimates that all the gold ever mined amounts to 174,100 metric tons. If this supply were divided equally among the world’s population, it would work out to less than one ounce a person.
Warren E. Buffett has a good way to illustrate how little gold there is. He has calculated that if all the gold in the world were made into a cube, its edge would be only 69 feet long. So the cube would fit comfortably within a baseball infield.
He also mentioned an NBER paper by Claude Erb and Campbell Harvey that took a look at long term gold prices and found them to be very stable.
Mr. Erb and Mr. Harvey presented a novel way of gauging gold’s return in the very long run: they compared what the Roman emperor Augustus paid his soldiers, measured in units of gold, to what we pay the military today.
They report remarkably little change over 2,000 years. The annual cost of one Roman legionary plus one Roman centurion was 40.9 ounces of gold. The annual cost of one United States Army private plus one Army captain has recently been 38.9 ounces of gold.
To be sure, military pay is a narrow measure, but this comparison offers some support for the view that, on average, gold should keep pace with wage inflation, which, thanks to productivity growth, runs slightly ahead of price inflation.