An analysis of gold as a financial asset : is it an efficient portfolio diversifier?

Abstract

Gold is quite a perplexing commodity. It is regarded as an inflation hedge, a safe haven and a strong diversifier by some and is dismissed as something out of a bygone era and a useless investment by others. The media, academic literature and general opinion are all conflicted on the subject. Till this day, almost fifty years after the dissolution of the Bretton Woods system, there is still no concrete conclusion about Gold’s usefulness to the investor and there still remains a relatively constrained amount of literature. What was intended by this study was to provide an in-depth analysis of gold’s diversification benefits in a global setting from different perspectives. Portfolios were constructed to simulate global, American and European scenarios and gold’s effect on those portfolios was tested thoroughly. Portfolios were also tested to distinguish the effects equity dividends had and if they diminished gold’s role in a portfolio in any way. Finally, gold was matched up against two different representatives of equity for the longest time periods possible for the chosen proxies. This study provided positive results for gold, revealing that gold has huge diversification benefits due to its low correlation with traditional assets. Its correlation was even found to sway to the negative in times of crises which deems gold an efficient safe haven asset. Thus, these facts along with the main characteristics of gold such as it being an efficient store of value, having no credit risk and being less risky than traditional assets give gold a place in the modern investor’s portfolio especially if risk aversion is a priority.