Conclusion
Gold is first and foremost a consistent portfolio diversifier. Moreover, we find that gold effectively helps manage risk in a portfolio, not only by means of increasing risk-adjusted returns, but also by reducing expected losses incurred in extreme circumstances. Such tail-risk events, while unlikely, can be seen to have a damaging effect on an investor’s capital. On one hand, short- and medium-term holders—individual and institutional alike—can take advantage of gold’s unique correlation to other assets to achieve better returns during times of turmoil. This is especially true given that gold’s correlation tends to change in a way that benefits investors who hold it within their portfolios. On the other hand, by including gold in their portfolios, long-term holders—such as retirement savings accounts, pension plans, endowments and other institutional investors—can manage risk without necessarily sacrificing much sought-after returns.
Our analysis suggests that even relatively small allocations to gold, ranging from 2 to 9 percent, can have a positive impact on the structure of a portfolio. We find that, on average, such allocations can reduce the VaR of a portfolio, while maintaining a similar return profile to equivalent portfolios that do not include gold. For the eight portfolios analyzed using data from January 1987 to July 2010, adding gold reduced the 1 and 2.5 percent VaR by between 0.1 and 18.5 percent.
We also note that investors who hold gold only in the form of a commodity index are likely to be under-allocated.There is a strong case for gold to be allocated as an asset class on its own merits. It is part commodity, part luxury consumption good and part financial asset, and as such, its price does not always behave like other asset classes and especially not other commodities.
Finally, while most of this analysis concentrates on risk in the form of tail-risk and volatility, gold has other unique risk-related attributes that make it very useful in periods of financial distress. For example, the gold market is highly liquid and many gold bullion investments have neither credit nor counterparty risk.
First, welcome to the forum. Glad to see you here.
I really enjoyed the article. I think it states what Browne and others have held for a long time. That is that gold actually can work in a diversified portfolio along with stocks and bonds. It can improve risk adjusted returns for investors.
The author also has connections to the World Gold Council according to Google so there can be claims of conflict of interest. Although I didn't find much gold buggery in the article, just a statement of observations that run counter to some commonly held views.
I am a bit concerned that if gold becomes mainstream, its usefulness in the PP will be harmed. Hence my oft-posted admonitions to fence-sitters to go away.
So, will popularity & hot money kill gold as a diversifier?
Snowman9000 wrote:
I am a bit concerned that if gold becomes mainstream, its usefulness in the PP will be harmed. Hence my oft-posted admonitions to fence-sitters to go away.
So, will popularity & hot money kill gold as a diversifier?
I don't think it will. The reason is that the supply of gold grows slowly over time. Since the supply is relatively fixed in the short run, an increased desire to hold gold is mostly satisfied by sales from existing holders. This is one of the reasons for the volatility of the price of gold.
"Machines are gonna fail...and the system's gonna fail"
Snowman9000 wrote:
I am a bit concerned that if gold becomes mainstream, its usefulness in the PP will be harmed. Hence my oft-posted admonitions to fence-sitters to go away.
So, will popularity & hot money kill gold as a diversifier?
I don't think so. Small Value has enjoyed a decade of recency—and hot money, along with REITS— and increased access to the asset class, yet Fama and French say:
"There is no evidence that the portfolio of all US equity mutual funds has become increasingly tilted toward small and value stocks over time. The aggregate portfolio still looks a lot like the market portfolio."
Now, though I don't see SV being advertised in commercials, I think so many institutional drivers (and individuals) performance chase and drift, so when volatile assets start tanking they start bailing, thus maintaining the balance of things.
