The “Real” Value of Gold - AllianceBernstein

Jon Ruff Director of Research—Real Asset Strategies Vincent L. Childers Research Analyst—Real Asset Strategies is driven mostly by sentiment, and The “Real” Value of Gold occasional mania. From ancient Egypt into the 21st century, gold has excited human passions. This debate has recently become Today, gold has once again become an object of desire—and of fierce headline news. As Display 1 shows, debate. But investors considering gold as a defensive investment may be gold is approaching its highest levels, better served by other “real” assets. adjusted for inflation, since the modern-day record set in 1980. Some prominent investment professionals Among investors, opinions regarding paper currency without gold’s backing have given gold further luster by talking gold have always been strong

and is essentially worthless. At the other up their purchases. In addition, new divided. At the one extreme are “gold extreme are skeptics who consider investment vehicles such as exchange- bugs,” who believe that gold is the gold to be a “barbarous relic” of traded funds (ETFs) have made trading ultimate store of real wealth and that ancient times whose perceived value in gold easier than ever before. Display 1: The gold bulls are running again Inflation-Adjusted Price of Gold, 2011 US Dollars 2,000 Current US$1,488 1,600 d l o G 1,200 f o e c i Average r P l 800 US$690 a e R 400 0 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06 08 10 11 Past performance does not guarantee future results. Through May 17, 2011 Real price of gold represented by gold spot price ($/oz.) in May 2011 US dollars, adjusted for inflation using US Consumer Price Index for All Urban Consumers, All Items Source: Bloomberg, Federal Reserve and AllianceBernstein Investment Products Offered • Are Not FDIC Insured • May Lose Value • Are Not Bank Guaranteed Our research found the historical record of gold as an inflation hedge to be a mixed one. US dollar may ultimately lose its role as reserves. Another is that the growing Yet there are other, more reliable Display 2: Economic variables significantly explain gold’s price the global reserve currency has been a middle class in emerging markets will hedges against inflation than gold. A Effect on Gold Price strong driver of demand lately. But create a surge in demand for gold diversified portfolio of real assets, such even without such an extreme out- jewelry. Even the fact that gold invest- as real estate, commodities and the come, our research does show a fairly ment is growing may feed upon itself: stocks of their producers, may provide 3 Supply Mining Output Decreasing Mining Output Increasing strong correlation between a falling In other words, if investors increasingly attractive inflation-sensitive characteris- dollar and rising gold price since the use gold as a diversification and tics while at the same time potentially US Dollar Weakening US Dollar Strengthening early 1970s. risk-hedging asset in their long-term offering better risk-adjusted return Inflation Expectations Increasing Inflation Expectations Decreasing strategic allocation, they may create an prospects. Demand A related catalyst driving demand is enduring new source...

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