Research

Gold: Real Asset, Risk Mitigator, or Pet Rock?

K E Y E L E M E N T S

While gold no longer backs the values of currencies, it does serve as a crisis-risk hedging tool in the short run and a proven store of value over the (really)long term relative to holding cash.

The biggest factor affecting gold prices is the prevailing real rate of return avail-able in the market, particularly for cash and fixed income.

For some institutional investors, gold may play a useful role in diversifying risk. Institutional investors have a variety of different ways to add gold to their portfolios.

“Investing in gold is like buying insurance. You need to buy

it before an inflation crisis happens to get attractive pricing.”

Jim McKeeCallan’s Alternatives Consulting Group

HEDGE FUND MONITOR | November 2019

2

(Gold) gets dug out of the ground in Africa, or someplace. Then we melt it down, dig another hole, bury it

again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be

scratching their head.

— Warren Buffett

Gold Fever: Back to the Future? After a five-year slumber cycling between $1,067 and $1,373 per ounce, gold has roared back to life. At

approximately $1,500, the price of gold is up 25% over the last year. Why the sudden interest and will it

last? As we ponder gold’s future, it is important to ask whether gold is still the quaint artifact that no longer

anchors currencies as it had for over two millennia and now rests in vaults with no apparent utility. Or,

given today’s unprecedented monetary circumstances, does gold’s recent resurgence presage a potential

paradigm shift in the outlook for global fiat currencies?1 If so, should institutional investors consider gold in

their portfolios as an asset or a hedge?

In this Hedge Fund Monitor, we review the history of gold as a form of money, the reasons behind the

renaissance in gold, the potential roles of gold for institutional investors, and the alternative approaches to

invest in gold-related themes. Although gold does not yield cash flow or suggest even a positive real rate

of return, it does serve as a hedging tool in the short run and a proven store of value over the long term. It

can also be a source of trading profits. Thus, for some institutional investors, gold can play a useful role in

diversifying risk or enhancing returns. For others, particularly those with higher risk tolerances and longer

time horizons, a strategic gold allocation has about as much purpose as a Pet Rock.2

Gold is money. Everything else is credit.

— J. P. Morgan

Show Me the Money: From Gold to Fiat CurrencyGold once was, well, the gold standard, second to none. Its time-tested performance as money is impor-

tant to appreciate when considering investments in it.

To be widely accepted, money needs to serve three key functions:

1. A store of value that people can confidently save and use later, eliminating the need to barter

2. A standardized unit of measure in which all goods and services can be transparently priced

3. A medium of exchange that enables people to readily buy and sell with each other

Perhaps most importantly, if it is believed to be money, it is money.

Dating back to the seventh century BC,3 gold has been used as a currency. And, until recently, unlike

paper currencies and American Express cards, it really was accepted everywhere. Its unique properties

1 This refers to currencies backed only by faith in the governments issuing them.

2 “Gold: It’s Still a Pet Rock,” Jason Zweig, The Wall Street Journal, July 8, 2016

3 “The Origins of Coinage,” British Museum

3

as a precious metal made gold a lasting standard versus other forms of money. Because gold is scarce

by nature, it retains its value better than alternatives that can be readily printed, mined, or otherwise pro-

duced. Gold’s assigned value as a currency has typically been close to its intrinsic value as a commodity,

making its acceptance as a currency more assured. Furthermore, since gold has limited practical uses, it

is not generally consumed and remains relatively constant as a store of value.

Because gold is costly to discover, mine, and process, the marginal cost of producing another ounce of

gold helps to define what otherwise might be considered an arbitrary price. The average all-in cost4 of

producing an ounce of gold was recently estimated to be about $1,100, not dramatically below today’s

market prices for gold. Since newly mined gold is increasing the world’s gold inventory by less than 2%

per year,5 gold markets have little risk of being oversupplied.

While gold as a form of money has been reliable, it can be unforgiving as the basis for creating credit, the

life blood of any modern economy. Economies tied to an absolute level of money, such as those backed

by gold, will struggle to grow quickly without credit, even with ample opportunities for business growth.

For this reason and more, the U.S. began to move off the currency standard of gold backing the U.S.

dollar during the Great Depression. Domestic transactions where gold was used as a currency in the U.S.

ended in 1933. From 19336 to 1974, private U.S. investors were not allowed to own gold. In 1971 the U.S.

officially ended the dollar’s international convertibility into gold, marking the end of an era of fixed currency

rates backed by gold and thereby allowing the dollar—and other currencies, by extension—to freely float

against the metal. Since gold’s price was fixed to some degree to the dollar prior to this event, gold had a

limited role as an investment. Now, without convertibility into gold, the U.S. dollar and all other currencies

are fiat currencies.

Able to extend credit without needing it backed by gold, these governments have more tools available

to stimulate investment and consumption and thereby help economies to grow and standards of living to

improve. After the Global Financial Crisis (GFC), governments needed to restart the credit expansion to

avoid a contracting economy. Consequently, accommodating monetary policies enabled unprecedented

levels of money supply and credit across the global economy.

We have gold because we cannot trust governments.

— Herbert Hoover

In God We Trust. How’s That Working for the U.S. Dollar?Confidence in a currency’s value is not constant or absolute—it can be gained or lost, slowly or quickly.

Not surprisingly, fiat currencies often have a turbulent history, as politics tempt governments to print more

4 “Today’s Gold Prices Are Not Much Above Production Costs,” ValueWalk, Aug. 19, 2017

5 “List of Countries by Gold Production,” Wikipedia; “How Much Gold Has Been Mined,” World Gold Council

6 On April 6, 1933, President Franklin D. Roosevelt issued an executive order (No. 6102) to confiscate all gold held by U.S. citizens at $20.67/oz. On Jan. 30, 1934, Roosevelt issued orders to devalue the dollar 69% versus the gold he had just confiscated. (Source: Sprott Gold Report, Feb. 20, 2019)

4

than their economies can absorb, thereby enabling corrosive inflation to take hold. In an extreme example,

inflation in Venezuela reached 10,000,000% in 2019, according to International Monetary Fund estimates.7

Most countries constrain their money supply growth to prevent such a loss of confidence. Still they are

motivated to debase their currencies over time so that public debts become easier to repay. Some degree

of inflation also encourages the currency holders to spend more and stimulate the economy. In contrast,

deflation could have a disastrous effect, as consumers postpone spending in anticipation of lower prices.

In the U.S., how has the dollar held up against inflation? Exhibit 1 illustrates the fate of a dollar, in real

terms, if it had been held in dollar-bill form, T-bills, or gold.

This history has three notable observations:

1. A dollar set aside in 1979 now has about 28 cents of purchasing power, after adjusting for inflation.

Putting cash under the mattress is clearly unproductive.

2. A dollar invested in Treasury bills is worth about $1.71, after adjusting for inflation, but it has lost

real value since 2009 when the Federal Reserve embarked on a prolonged campaign of keeping

short-term rates well below the rate of inflation. From 1979 to 2009, annualized real returns on

T-bills were +2.2%; for the last 10 years ended 2019, real returns have been -1.2%. Since the GFC,

the Fed has deliberately set short-term rates below the inflation rate to encourage consumers to

spend and businesses to borrow. Steady erosion of invested cash is a subtle but powerful effect of

the Fed’s recent monetary policy at work.

7 https://www.imf.org/external/datamapper/datasets/WEO/2

Exhibit 1

Fate of a Dollar vs. Inflation

79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19

$0

$0.50

$1.00

$1.50

$2.00

$2.50

$3.00

End

ing

Mar

ket V

alue

Real Gold Real T-Bill Real Dollar

Source: CallanReturns adjusted for inflation

5

3. A dollar converted to gold in 1979 has had both terrifying and exhilarating rides in value. And at the

end of this ride, the real value of gold is about 40% below its high in 1979—hardly the store of stable

value one might expect for a “gold standard.” However, for the full period, gold’s real return over infla-

tion averaged +0.9% annually. Over the last 10 years, the real return on gold was +2.5% annually.

What is reasonable to expect for gold in the next decade?

Gold Then and NowNo longer tied to the value of the dollar, gold prices are subject to supply and demand. But while the

supply of dollars ebbs and flows, the gold supply does not. The biggest factor affecting gold prices is the

prevailing real rate of return available in the market, particularly for cash and fixed income. Important

in the assessment of such real rates are the perceptions of factors influencing monetary policy, such

as evolving trade tensions, government budget deficits, unemployment, and asset valuations. Since the

dollar floats freely against gold, these perceptions have powered the roller coaster ride of gold prices in

Exhibit 1. Other factors affecting the supply and demand of gold, such as mining companies with dwindling

reserves and increasing secular demand in Asia, marginal cost of production close to prevailing market

prices, and actions of central banks like China, Russia, and India increasing gold purchases,8 are a distant

second given the vast size of existing global gold stocks.9 Since gold mining is broadly distributed around

the world, supply shocks that might increase gold’s volatility are somewhat mitigated. Also, recycled gold

driven by higher prices helps to suppress rapid escalations of gold prices.

What’s different about today’s monetary conditions than those in 1979, 1989, 1999, or 2009? The Federal

Reserve, like many central banks, is explicitly targeting 2% inflation, in contrast to a previously vaguer

mandate of “stable prices.” In past decades, exceeding a 2% inflation target was not an issue. In 1979,

annual inflation was more than 10%. To dial back inflation by rationing credit, the Fed targeted positive

real rates of return on cash. However, secular forces of increasingly globalized trade, indebted govern-

ments, aging demographics, consumer-empowering technologies, and other factors have suppressed

inflation to such a degree that deflation is now an omnipresent risk in most developed markets. And a

recession coupled with deflation will be especially difficult to reverse, given prevailing conditions. As Fed

Chair Jerome Powell recently proclaimed, the Fed is committed to “sustaining the expansion” as part of

its expanded mandate. That implies lower rates, more quantitative easing, and whatever else it takes to

keep credit flowing and growing.

Other central banks in developed markets are even targeting negative nominal rates on cash. Prior to

2015, the world had never had negative-yielding debt. Now roughly $15 trillion of the developed world’s

government debt, or 25% of the bond market, has negative yields.10 Given the record high levels of

government debt in virtually all developed countries, the prospect of interest rates rising to a neutral rate

8 “World’s Central Banks Want More Gold,” Bloomberg, April 23, 2019

9 “Key Gold Market Statistics,” GoldHub, World Gold Council

10 “Investors Ponder Negative Bond Yields in the U.S.,” The Wall Street Journal, Aug. 11, 2019

6

where real returns are zero or even positive has become increasingly unlikely. Consumers holding cash or

negative-yielding fixed income will be prodded to either spend or invest in assets like real estate, stocks,

or gold that can still appreciate with inflation.

What will undermine gold values? Higher real rates of return on cash due to rising nominal rates or fall-

ing inflation will blunt gold’s appeal. Also, a sustained increase in economic productivity will create real

demand for credit that translates into more positive real rates. Unexpected increases in the gold supply

will weigh on pricing too.

If one expects cash to yield more positive real returns in the foreseeable future, holding gold will be akin

to buying that Pet Rock again. However, if the global long-term outlook for cash becomes more negative

yielding, gold’s immutable physical stock becomes more valuable.11

Gold Versus CryptocurrencyAnother factor potentially influencing the future demand for gold as an inflation hedge is the emergence

of cryptocurrencies (see our paper on the subject). These digital creations of ostensibly unprintable cur-

rencies are capturing the imagination of speculators and visionaries. In addition to their codified supply

constraints, cryptocurrencies can be readily used in commercial transactions like fiat currencies, but unlike

physical gold. Moreover, cryptocurrencies can be transferred across government borders without restric-

tions that affect many fiat currencies.

These properties have made cryptocurrencies popular among persons avoiding government interference,

and the allure of their promise seems as shiny as gold to many believers. But they have not won enough

hearts and minds in the broader population to be widely accepted as a recognized currency, and the

total market value of cryptocurrencies is tiny compared to that of gold. Confidence in cryptocurrency may

remain elusive because nothing is backing the underlying code that “promises” not to dilute or erase the

cryptocurrency’s value.

However, given the significant depth of gold bullion markets, an independently certified cryptocurrency

backed by gold might create the catalyst for broad acceptance. As a standalone currency, gold has several

notable shortcomings besides its inflexible supply to enable credit in economic cycles: relatively high

storage/transaction costs, wide retail trading spreads, and the inability to settle consumer transactions in

its physical form. A digital currency backed by gold, if regulated or otherwise supported by a recognized

sovereign authority, can overcome these reasons for gold’s lost role as a store of monetary value as well

as a medium of exchange. Stay tuned.

11 The Fed’s recent reversal of its monetary policy from raising rates to a neutral level to dropping real rates back into negative territory was a key catalyst for gold prices to skyrocket. Gold may not yield dividends, but it could be considered akin to a Treasury strip that promises a known deliverable in the future—“discounting” the value of that fixed deliverable with a negative real rate will have a positive inflationary effect.

7

It doesn’t do anything but sit there and look at you.

— Warren Buffett

Roles of Gold for Institutional Investors While gold as a percent of total reserves is relatively small, many central banks like those in China, India,

or Russia have been building gold holdings since the GFC. The need for gold as a short-term cash-like

holding may apply to central banks defending or diversifying their foreign exchange reserves, but what are

the possible roles of gold for institutional investors with longer-term investment objectives? How can gold

serve to enhance return or reduce risk? Does gold have a strategic purpose or more of a tactical one?

Depending on its unique circumstance, each investor will have different answers to these questions. Let’s

review gold’s possible risk-reducing and return-seeking roles.

Risk ReductionGold can serve a specific role in hedging two types of risk: inflation risk and crisis risk.

Inflation Risk Hedge: In prolonged periods of negative real rates of return, cash will reliably suffer a steady

erosion of purchasing power. Gold exposure for an institutional investor’s material cash allocation can help

to offset inflation. Similarly, for investors with a conservative risk profile, a material gold allocation serves

well as an inflation hedge while also diversifying the fixed-income assets that are more of a deflation

hedge. However, the argument for a strategic allocation in more aggressive risk-seeking portfolios with

higher real return objectives appears less persuasive.

The challenge for investors wanting to hedge inflation is to decide whether the prevailing price in gold

represents value and is worth the extra volatility. A commitment to invest in gold will also be difficult to

maintain, let alone replenish, when gold prices subsequently hit cyclical lows. Over the last 40 years ended

June 2019, gold’s annualized return was 4.1%, outpacing the annualized 3.2% inflation rate. However, the

annualized standard deviation of gold’s return was 18.6% compared to inflation’s 1.2% standard deviation.

Believers in gold as an inflation hedge will need a tight seatbelt of discipline to keep themselves in place.

Crisis Risk Hedge: In addition to providing a hedge against corrosive inflation, gold often performs well

during financial or geopolitical crises where a flight to safety occurs across capital markets. As risk assets

trade down, gold allocations can be a ready source of cash for purposes of rebalancing. Gold allocations

adopted as a strategic inflation hedge can also represent a crisis hedge that serves as the source of

rebalancing funds if such a crisis occurs.

8

Over the last four decades during bear markets in which equities fell roughly 20% or more, gold has often

been a positive performer along with other hedging strategies such as trend-following, long Treasuries,

inflation-linked bonds, and Treasury bills. Exhibit 2 highlights the cumulative returns of alternative “safe

havens” during these difficult periods for equities. With interest rates at the zero bound or below, how

much more upside can Treasuries of any kind offer as a crisis risk hedge relative to gold?

Gold as a Real Asset?Unless one lends gold and collects interest on the cash collateral, gold is not a productive asset. As a

buy-and-hold investment, gold has a long track record of matching inflation, but not necessarily more.

Institutional investors with significant cash reserves or fixed income exposures at risk of inflationary pres-

sures or currency shocks can rationalize a strategic gold allocation for its real asset properties. However,

beyond the scope of hedging inflation risk in any strategic cash allocation, adding more gold exposure is

less compelling.

Alpha Potential?Despite its limited role in a strategic allocation, gold does offer the potential for creating profits from tactical

allocations. However, speculation on future gold moves is akin to buying stocks. A myriad of forces drives

gold prices up and down, causing it to stray from its long-term expectation of matching inflation, more or

less. Similarly, gold-mining stocks rise and fall dramatically relative to other public equity alternatives. Until

recently, gold-mining stocks had been a terrible investment over the last decade, but the next decade

offers a more favorable environment for gold miners, as discussed later. In addition to outright investments

in gold or some form of such exposure, arbitrage strategies between gold and other precious metals, like

silver, are popular to consider when their relative prices are outside of historical relationships. Similarly,

a paired trade of gold and mining stocks can be an arbitrage opportunity when relative pricings are at

extreme levels and hedging the mining output protects against downside risks.

Unless an investor has an edge on market pricing in precious metals or mining stocks, these tactical

efforts to capture alpha can be a fool’s errand, leading one to buy high and sell low. Even well-informed

market participants, like systematic or discretionary macro traders or dedicated precious metals stock

pickers, struggle to consistently add value from tactical decisions to buy and sell gold-related themes.

Dec '80 - Jul '82

Sep '87 - Nov '87

Jan '90 - Sep '90

Apr '00 - Sep '02

Nov '07 - Feb '09

MSCI World -19 .3 -20.5 -24.3 -46.8 -54.0

S&P Gold Spot Price -44.8 8.4 0.7 15.6 18.5

BarclayHedge BTOP50 Index — 8.5 13.1 32.2 13.8

Bloomberg Barclays Long Treasury 15.9 2.6 -2.2 35.5 16.8

Bloomberg Barclays US TIPS — — — 35.7 1.1

90-Day T-Bill 26.4 1.6 6.1 10.8 2.8

CPI-U 14.0 0.9 5.2 5.7 1.6

Exhibit 2

Returns of Crisis Risk Hedges in Bear Markets

9

If you own one ounce of gold for an eternity, you will still own one ounce at its end.

— Warren Buffett

How to Invest in Gold?Whether to reduce risk or enhance return, gold has a variety of different means for investing in it.

Physical GoldInvestors can hold physical gold bullion such as bars or coins. Directly investing in physical gold bullion

involves a secure storage facility and cost of insurance, potentially making this tactic an expensive propo-

sition. Unless investors are willing to manage the logistics of owning physical gold, other alternatives are

more cost effective.

ETFsBecause of their convenience, liquidity, and relatively low cost, ETFs are the most common vehicles for

investing in gold.12 ETFs investing in gold incur the same storage and security costs as individuals do, but

they can benefit from scale to keep such costs low. While ETFs serve as a proxy for physical gold, inves-

tors need to consider several issues, such as operating costs, the form of gold ownership, the ability of

investors to convert into the underlying gold represented, assets under management, and the ETF’s mar-

ket liquidity. The operating costs associated with each ETF can widely vary. Lower costs, though, should

not necessarily be a standalone screening criteria. In addition, some ETFs earn incremental income by

lending their physical stocks, but this has risks, much like any securities lending operation. To avoid the

costs of physical storage, other ETFs only invest in listed derivatives that closely track the price of gold

while holding cash as collateral for the derivative’s notional exposures. While based on underlying gold

holdings or related derivatives, ETFs trade like stocks and can vary from the underlying fair value. Some

ETFs allow investors to redeem and take physical delivery of the gold, which can be an attractive feature.

Futures and OptionsExchange-traded derivatives provide a means for investors to speculate or hedge the future price of gold

with limited counterparty risk. Such derivatives can involve leverage, thereby magnifying the gains and

losses. Expiration dates on futures and options also require actively managing and rolling the positions as

needed. Such leverage without material capital outlays makes derivatives attractive vehicles for hedging

or overlaying gold exposures with other portfolio positions. For example, if one strategically prefers gold

as the embedded “currency” risk, a gold futures position can cover the notional exposure of an investment

based in dollars or another currency. Voila—you have an investment now priced in gold, not dollars or

some other fiat currency.

Under certain circumstances, options can also be a more attractive means for investing in gold, instead

of owning gold outright. For example, if the gold option’s implied volatility is understated based on the

investor’s view of pending central bank actions or other macro-related risks affecting gold, such an

12 Among the many gold ETFs available are SPDR Gold Trust (Ticker: GLD), iShares Gold Trust (IAU), Aberdeen Standard Physical Gold Shares (SGOL), Invesco DB Gold Fund (DGL), Sprott Physical Gold Trust (PHYS), and Van Eck Merk Gold Trust (OUNZ).

10

“undervalued” option can dramatically increase in value when realized volatility awakens to such looming

risks. However, being disciplined at selling the option when volatility spikes requires an experienced hand,

since volatility can quickly recede and erode the option’s value.

Gold-Mining StocksInstead of investing in the physical asset or its derivatives that represent “above ground” gold, buying

gold-mining stocks is another alternative for tapping gold’s investment potential, particularly as a return-

enhancing strategy. Investing in gold-mining companies is effectively an option on the underlying gold

reserves. Valued based on current gold prices, the company’s stock reflects its present ability to profitably

extract its gold reserves. As the price of gold rises above the firm’s marginal cost of extracting that gold,

the firm’s profitability increases dramatically with its operating leverage.

Of course, the downside risk can quickly appear as well when gold prices fall below that marginal cost of

production. As investors have witnessed in past gold price spikes, the financial discipline of gold-mining

executives can be weak in the pursuit of new mines with unproven gold reserves. Poor capital allocation

decisions led to substantial losses in the gold-mining industry when gold fell about 40% from its 2011

high to its 2015 low and marginal costs of production rose dramatically above the plunging gold prices.

Consequently, in this period, gold-mining stocks fell much more than gold itself, illustrating the higher

investment risk profile. Gold-mining executives promise to be more financially disciplined. But the risks

of operating leverage with high fixed costs will remain endemic to commodity-producing businesses like

gold miners.

To make a strategic allocation to gold-mining equities, investors will likely need to consider a dedicated

investment manager, since traditional managers typically allocate little or no capital to this relatively small

sector. Because gold-mining stocks are based on cash flows discounted by prevailing interest rates and

other macro factors, like other stocks, the performance of gold-mining stocks can be more correlated with

equity markets than gold itself. However, the bottom line of the stock’s earnings ability ultimately drives

the investment’s performance. As gold moves above and below the marginal cost of gold production, the

fate of each gold-mining stock shifts accordingly. For the well-informed, disciplined stock picker, a golden

opportunity for higher returns awaits. If the equity of gold-mining companies is deemed too risky, a related

but less liquid investment opportunity is direct lending to such companies where the credit is backed by

the borrower’s gold reserves.

In the long run we are all dead.

— John Maynard Keynes

Gold Fever or Bust?Based on the last four decades, gold appears to be a bust relative to traditional stocks and bonds.

Exhibit 3 shows the cumulative returns of gold spot prices and the average Morningstar Equities

Precious Metals fund over the last 40 years ended June 30, 2019, along with benchmarks for global

equity, U.S. fixed income, cash, and inflation. Although gold returns briefly surpassed Treasury bill

11

returns in 2012, gold fell back while T-bill returns held steady to regain the lead. In a similar story, the

precious metals fund (net of fees) briefly surpassed the MSCI World return in 2011 before crashing to

earth for reasons noted above.

During this 40-year history of gold and other markets, it is notable that gold was virtually uncorrelated

with the equity and fixed income benchmarks. As shown in Exhibit 4, gold returns had a 0.07 correlation

with MSCI World and, not surprisingly, a 0.75 correlation with the average gold miner fund. The gold

miner fund had a relatively modest 0.31 correlation with the equity index. Gold and gold miner funds

had positive but still low correlations with the CPI-U inflation measure, while the Treasury bill was much

more correlated with inflation (0.48). This observation is also not surprising, since the Federal Reserve

79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09 11 13 15 17 19-500%

0%

500%

1,000%

1,500%

2,000%

2,500%

3,000%

3,500%

4,000%

Cum

ulat

ive

Ret

urns

MSCI World Bloomberg Long Treasury Morningstar Equity Precious Metals 90-day T-Bill S&P Gold Spot Price CPI-U

Exhibit 3

Gold Versus Other Benchmarks

Sources: Bloomberg Barclays, Callan, Morningstar, MSCI, Standard & Poor’s

S&P Gold Spot Price 1.00 0.75 0.07 0.11 -0.08 0.14

Morningstar Equity Precious Metals 0.75 1.00 0.31 0.02 0.01 0.16

MSCI World 0.07 0.31 1.00 -0.06 0.02 0.00

Bloomberg Barclays Long Treasury 0.11 0.02 -0.06 1.00 0.06 -0.28

90-day T-bill -0.08 0.01 0.02 0.06 1.00 0.48

CPI-U 0.14 0.16 0.00 -0.28 0.48 1.00

S&P Gold Spot Price

Morningstar Equity Precious

Metals

MSCI World Bloomberg Barclays Long

Treasury

90-day T-bill CPI-U

Exhibit 4

Correlation of Gold with Key Indices

Sources: Bloomberg Barclays, Callan, Morningstar, MSCI, Standard & Poor’s

12

sets short-term interest rates that hew closely to inflation, while the gold and gold equity markets are

much more anticipatory. The price of gold and its derivatives, including gold miners, moves up or down

depending on whether the central bank is becoming looser or tighter with its monetary policy, among

other macro factors.

This last observation brings us to the final point about gold and its future. As we all know well, past

performance is not indicative of future results. The past 40 years represents a very long time frame, but

it captures the full secular decline of U.S. interest rates that followed inflation down from double digits.

Short of a miracle, neither stocks nor bonds will enjoy another windfall of profit over the next 40 years

from such a buy-and-hold strategy. Today interest rates are at historical lows while inflation shows little

sign of moving up or down. As the Federal Reserve retraces its previously tighter monetary path and

contemplates a much looser route, gold-related markets are alive again with speculation. As discussed

earlier, if governments push ahead with more negative real interest rates and other easy money policies,

gold and other real assets that cannot be printed by the central banks will be attractive alternatives to fixed

income and cash that are likely to depreciate over time. If one perceives that inflation and crisis risks are

underappreciated by the market, gold’s hedging role is then worth considering.

If you are sick, think about your life; if you are better, think about your gold.

— Mongolian Proverb

Gold—Worth Its Weight?The long history of gold as a form of money is impressive, as it has held its value against inflation well.

Perhaps too well. Although governments have only recently abandoned this strict standard to enable an

epic era of credit expansion, gold’s role as an inflation hedge and crisis hedge survives. However, since

gold offers no yield, its role depends on the attractiveness of competing cash alternatives. While past

periods of high real rates of return on cash alternatives obviated the need for gold’s inflation-fighting

properties, other periods of negative real rates of return have supported the renaissance of gold as a

preferred store of value.

Currently the global economy is reasonably healthy. However, negative rates of return anchored by central

banks on cash and even long duration bonds may be a chronic reality for the decade ahead. Central banks

want people to spend more, not save, to keep their economies running. Consequently, the outlook for gold

and other real assets that cannot be printed is arguably better than that of debt that can be debased with

negative yields. Gold may be gone as a physical currency of exchange, but the outlook for gold as an

inflation hedge as well as crisis hedge looks compelling. How much of a role gold will play for investors

depends on each investor’s unique circumstance. Because gold’s price can move quickly as sentiment

pivots between complacency and fear, investing in gold is like buying insurance. You need to buy it before

an inflation crisis happens to get attractive pricing.

13

About the Author

Jim McKee is a senior vice president in Callan’s Alternatives Consulting Group.

He specializes in hedge fund research addressing related issues of asset alloca-

tion, manager structure, manager search, and performance evaluation for Callan’s

institutional clients.

Certain information herein has been compiled by Callan and is based on information provided by a variety of sources believed to be reliable for which Callan has not necessarily verified the accuracy or completeness of or updated. This report is for informational purposes only and should not be construed as legal or tax advice on any matter. Any investment decision you make on the basis of this report is your sole responsibility. You should consult with legal and tax advisers before applying any of this information to your particular situation. Reference in this report to any product, service or entity should not be construed as a recommendation, approval, affiliation or endorsement of such product, service or entity by Callan. Past performance is no guarantee of future results. This report may consist of statements of opinion, which are made as of the date they are expressed and are not statements of fact. The Callan Institute (the “Institute”) is, and will be, the sole owner and copyright holder of all material prepared or developed by the Institute. No party has the right to reproduce, revise, resell, disseminate externally, disseminate to subsidiaries or parents, or post on internal web sites any part of any material prepared or developed by the Institute, without the Institute’s permission. Institute clients only have the right to utilize such material internally in their business.

If you have any questions or comments, please email institute@callan.com.

About CallanCallan was founded as an employee-owned investment consulting firm in 1973. Ever since, we have

empowered institutional clients with creative, customized investment solutions backed by proprietary

research, exclusive data, and ongoing education. Today, Callan advises on more than $2 trillion in total

fund sponsor assets, which makes it among the largest independently owned investment consulting

firms in the U.S. We use a client-focused consulting model to serve pension and defined contribution

plan sponsors, endowments, foundations, independent investment advisers, investment managers, and

other asset owners. Callan has six offices throughout the U.S. Learn more at www.callan.com.

About the Callan InstituteThe Callan Institute, established in 1980, is a source of continuing education for those in the institutional

investment community. The Institute conducts conferences and workshops and provides published research,

surveys, and newsletters. The Institute strives to present the most timely and relevant research and educa-

tion available so our clients and our associates stay abreast of important trends in the investments industry.

© 2019 Callan LLC

Corporate Headquarters

600 Montgomery Street Suite 800San Francisco, CA 94111800.227.3288415.974.5060

www.callan.com

Regional Offices

Atlanta800.522.9782

Chicago800.999.3536

Denver855.864.3377

New Jersey800.274.5878

@CallanLLC Callan

Portland800.227.3288