The role of gold in an investment portfolio

Abstract

The aim of this dissertation is to investigate whether gold is a good investment to have in an investment portfolio. The researcher decides to use descriptive statistics together with the Ordinary Least Squares regression method in order to examine the type of relationship, if any, that exists between gold and equity returns, and to investigate the hedging properties of gold during market distress. Weekly historical data of gold prices and the S&P 500 Index is used during three periods of market distress during the last thirty-five years namely, the Black Monday Stock Market Crash of the late 1980s, the Dotcom Bubble Crisis and the Global Financial Crisis 2007-2009. The key findings of this study show that there is a statistically significant negative correlation between gold and equity only during the Black Monday Crash, thus suggesting that gold is a good hedge against equity during this period. This study also shows that, although gold is not significantly correlated with equity, gold seems to be, at least, a partial hedge, during the Dotcom Bubble Crisis and the Global Financial Crisis. Consequently, gold seems to be a good addition to an investment portfolio, in times of market distress, since investors might minimise losses or at least lower the volatility of their returns if they include gold in their portfolio.