This paper (click the above link) is from the Financial Analysts Journal, July/August 2013 edition.
In it the authors Mr. Claude B Erb and Mr. Campbell R. Harvey investigate six of the most commonly cited reasons for owning the yellow metal and conclude only one, an argument about under-ownership, may have some validity.
They find little evidence that gold is a reliable inflation hedge, a currency hedge, an alternative to low yielding assets, a safe haven in times of stress or that the world is somehow returning to a de facto gold standard.
One of the more interesting findings is that gold exhibits positive price demand elasticity; which is a fancy way of saying herd mentality may explain a lot of past (and by implication future) price movement. I note as an aside the holdings of the SPDR Gold Trust ETF (GLD) peaked in December 2012 at 1, 353 tonnes (gold then U$1,657/oz) but as of last Friday had fallen by 41% to 795 tonnes (gold now U$1,300/oz).
They concede that gold’s correlation to other asset prices is low and from a CAPM point of view therefore a portfolio aiming for a market neutral beta should probably have more than most institutional investors possess today. Moreover, if central banks in emerging economies emulate developed market peers, especially the US, then future demand from these newly minted players could have a very positive effect on future prices.
On balance though they concluded, just over a year ago, that gold was then a long way north of what history implied was its more correct long run value.
If you have time I believe the best and by far most succinct analysis of gold in recent years has come from Wazza Buffet and is contained in his 2011 letter to Berkshire shareholders which you can access via the following link http://www.berkshirehathaway.com/letters/letters.html. Skip to half way down page-18 for his take (-down) which is, IMHO, ahem!, pure gold?
Happy Sunday