Why Does Harvard Economics Professor Call Gold a High Risk, Highly Volatile Investment?

In my continued exposure of those who write articles that misrepresent gold I’ve run across an article written recently by former Ronald Reagan chief economic adviser and current Harvard Economics Professor, Martin Feldstein called “Is Gold a Good Hedge?”

I dissect Feldstein’s article that is full of what I believe to be deliberate misinformation to confuse readers as to what gold truly represents in today’s economic and investment climate.

Why Do So Many Financial and Economic Experts Not Understand Gold?

Naturally when I set out to critique a CFP, CFA, PhD or financial guru’s understanding of gold, I have to realize that these folks are bright individuals.  I too was a financial advisor for over 20 years.  I would like to think I learned something during that time.

For myself, about six years ago I started to dig a little deeper than what my University degree, corporate training and even the Certified Financial Planner (CFP) books I purchased in preparation for earning my CFP designation, would offer me in understanding what was really going on in the economy and with my clients investments.  I just didn’t have any faith in what I was hearing through the normal channels as things just weren’t adding up from an economic and investment perspective.

I was a product of the U.S. financial advisor system where the first real step in acquiring clients was to obtain the most prestigious credential offered, “CFP” given by the College for Financial Planning.  I even went so far as to acquire the California license plate “CFP.”

But when I set out to write a book about gold and how it needed to be a part of one’s portfolio in 2005, I found there was a much bigger project to go after and started my research accordingly.  If one doesn’t step out and question things, they’ll continue the same pattern and never be the wiser.  That project is still in the works.

As gold was taking off in price, I decided to finish my book on gold just so people could get a handle on it since buying gold is a mystery to most in America. I wrote a book on gold and silver, “Buy Gold and Silver Safely” and continue to keep tabs on the gold market, exposing misinformation when my Google Alert points me to the negative gold articles.

Harvard Professor Martin Feldstein’s Article Critique

Today’s Google Alert comes from Harvard Professor Martin Feldstein’s article mentioned above.  I do not doubt the intelligence of anyone who has accomplished what Feldstein has accomplished.  He wouldn’t have served as President and CEO of the National Bureau of Economic Research if he didn’t have what it intellectually takes to do so.  But all of the MBA’s, PhD’s, Wharton, Yale and Harvard boys and girls didn’t exactly help us in this most recent recession that caused George W. Bush to proclaim “no recession for U.S.” in February of 2008.  Yep, they were all wrong.

Our entire education system is biased against gold.  The CFP books I purchased years ago which were supposed to help me, as a financial advisor do right by my clients.  They didn’t.

Someone has to expose to the general public the negative bias these folks put forth so individuals can at least make good financial decisions and have a better understanding of what’s really going on in the economy and with their investments.  I am that person.

The following quotes are taken from Feldstein’s article:

Feldstein’s Misinformation About Gold and Inflation

Consider first the potential of gold as an inflation hedge. The price of an ounce of gold in 1980 was $400. Ten years later, the US consumer price index (CPI) was up more than 60%, but the price of gold was still $400, having risen to $700 and then fallen back during the intervening years. And by the year 2000, when the US consumer price index was more than twice its level in 1980, the price of gold had fallen to about $300 an ounce. Even when gold jumped to $800 an ounce in 2008, it had failed to keep up with the rise in consumer prices since 1980. So gold is a poor inflation hedge.

It amazes me how many of the critics of gold always use the 1980 price of gold to start their analysis.  In this case though I have to give Professor Feldstein some credit as he didn’t use the January 1980 all-time high price of $850as his starting point, but did use the adjusted 1980 monthly average high of around $400.

But here’s where the wool is pulled over most people’s eyes.  Why didn’t the esteemed Professor use the 1971 price of gold when Nixon took the U.S. Dollar (aka; Federal Reserve Note) off the gold standard?  The average price of gold was $40.81 in 1971 when Nixon did this and individuals could not even purchase more than $100 of gold until 1975 when the price of gold averaged $161.02.

Apples to Apples Comparison of Gold and the CPI

So using 1971 or 1975 would be a better time-frame to begin an apples to apples comparison of Gold and the CPI.

Utilizing 1971 average price of gold of $41.80 we get the following values (1,2):

In 2008, $41.80 from 1971 is worth:

$222.16 using the Consumer Price Index

Utilizing the 1975 average price of gold of $161.02, we get the following values:

In 2008, $161.02 from 1975 is worth:

$643.91 using the Consumer Price Index

Either one of those two starting dates paints a much different picture thatn Professor Feldstein’s article doesn’t it?  The price of gold in 2008 averaged $816.09, well above the $643.91 CPI price.

What Date Should Be Utilized In Comparing the Price of Gold to the CPI?

Being that individuals could buy as much gold as they wanted to again, without government restraints, I believe that 1975 is a better year to begin one’s analysis.  Any advisors writing articles that try to price gold anytime before 1971 you can describe as irrelevant as the price of gold was fixed by the government up until 1971.  There was no free market in gold until 1975 and that’s why the year 1975 is a good starting point for any fair comparative analysis of the price of gold to the CPI.

But why did gold provide a better return than the CPI during this time-frame?

The answer lies in the fact that the CPI has been changed over the years.  While Feldstein doesn’t address this fact and it’s not clear which CPI index he uses, I am clear to give full detail as to where my CPI data comes from taking into account the various changes to the CPI index over the years.  It’s not as black and white as the Professor would have you believe, especially when you want the outcome to be slanted a certain direction.

In fact, the folks at give six different ways to calculate the relative value of a dollar.  Using the 1975 price of gold for all six calculations we get the following:

In 2008, $161.02 from 1975 is worth:

$643.91 using the Consumer Price Index
$520.45 using the GDP deflator
$746.14 using the value of consumer bundle
$632.83 using the unskilled wage
$1,007.03 using the nominal GDP per capita
$1,419.89 using the relative share of GDP

Depending on which of these calculations comes closest to your views of relative value of the U.S. dollar will tell you whether gold is under priced or overpriced at present.  The average of these calculations is $970.17.  But keep in mind, this is as of the end of 2008 where the average price of gold was again, $816.09.

More Misleading Information from the Professor

The other issue to observe in the quote above is his statement;  “Even when gold jumped to $800 an ounce in 2008, it had failed to keep up with the rise in consumer prices since 1980.” I’ve already shown this to be untrue, but did you catch what Feldstein tried to do?  He included CPI data and gold price information as of the end of 2008 but wrote the article in December of 2009 and left out the last $300 of growth in price of gold in his analysis.  Isn’t this further proof of bias?  Shouldn’t he have included the year 2009 increase in the price of gold in any fair comparisons?

But Wait, There’s Central Bank Selling of Gold That Also Needs To Be Considered

To be fair to gold in giving the reader the big picture, keep in mind that the Central Banks of the world have been selling gold via various agreements since 1999 thus suppressing the price of gold during a decade of the analysis.   I don’t think the citizens of Switzerland are too happy about that as their central bank sold 60% of their holdings at prices on average well below $700 an ounce. Also keep in mind that prior to the year 2000, there wasn’t much competition to the U.S. dollar and since that time there has been introduced some very liquid alternatives to the greenback including the EURO as well as various liquid ETFs including gold ETFs.

Professor Feldstein concludes;

Nevertheless, although gold is not an appropriate hedge against inflation risk or exchange-rate risk, it may be a very good investment. After all, the dollar value of gold has nearly tripled since 2005. And gold is a liquid asset that provides diversification in a portfolio of stocks, bonds, and real estate.

But gold is also a high-risk and highly volatile investment. Unlike common stock, bonds, and real estate, the value of gold does not reflect underlying earnings. Gold is a purely speculative investment. Over the next few years, it may fall to $500 an ounce or rise to $2,000 an ounce. There is no way to know which it will be. Caveat emptor .

In one paragraph above he calls gold a “good investment” and the next he calls it a “speculative investment.”  This is where Professor Feldstein really misses the boat.  Gold, as I have repeatedly been saying in my articles of late, is “just a shiny metal” as the naysayers like to claim.  Indeed, if you buried your gold metal in your back yard 10 years ago, and dug it up today, the metal will not have changed.  It might have some dirt on it, but it will clean up nicely and still be a shiny metal.

So if the shiny gold metal didn’t change in the 10 years you had it buried, how can it be either a “good” or “speculative” investment at the same time as Professor Feldstein claims?

The answer lies in what gold is priced in.  In the analysis above it is the price change in U.S. Dollars that we have been analyzing.  So in reality, it is the U.S. Dollar that is “speculative” in the sense it’s value is fluctuating up and down (mostly down).  This depreciation of the U.S. Dollar actually makes the gold shiny metal increase in value.  Granted their are supply and demand issues that will play out as well as Central Bank manipulation, but it is what gold is priced in that matters most.

Lately, gold has been depreciating versus the U.S. Dollar but appreciating against the EURO.

The Professor also states that “Unlike common stock….., the value of gold does not reflect underlying earnings.” But as the price of gold rises, stocks also have not kept pace with the falling U.S. Dollar.

So while the professor laments; “Over the next few years, it may fall to $500 an ounce or rise to $2,000 an ounce. There is no way to know which it will be,” an astute investor can assume that congress and the Federal Reserve will always do what they do best. This alone is reason enough to own gold, not as an investment, but insurance against the U.S. Dollar whose only destiny is further depreciation until Congress and the Fed cease their monetary madness.  Time will only tell if it’s too late to do anything about it.  What do you think Congress will do?  God only knows what the Fed is up to as they and other connected individuals use their power to fight any attempts at transparency.

On a Personal Note

I have since sold the “CFP” license plate for $1,000.  Not bad for a $40 investment!  I am having more fun continuing to challenge CFP’s and any other journalist, financial advisor, guru or biased professor in their attempts to discredit gold as a viable and needed asset for a well diversified portfolio, especially against U.S. Dollar based assets that make up most of U.S. citizens portfolios.

Maybe I can help more people make money and keep their wealth without all those SEC and government regulations keeping me from telling the truth.


(1) Samuel H. Williamson, “Six Ways to Compute the Relative Value of a U.S. Dollar Amount, 1790 to Present,” MeasuringWorth, 2009. URL
(2) All average gold price data from


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About Doug Eberhardt

Doug Eberhardt is a 28 year financial services veteran and precious metals broker selling gold and silver at 1% over wholesale cost. Doug has written a book to help investors understand how gold and silver fit into a diversified portfolio, how to buy gold and silver, and what metals to buy. The book; “Buy Gold and Silver Safely” is available by clicking here Contact phone number for Buy Gold and Silver Safely is 888-604-6534


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