Asset Class Reader: Gold

The diversification benefits of adding gold to a portfolio of financial assets are discussed in the following papers. Our first paper offers a comprehensive (although slightly dated) description of the global gold market. The primary diversification benefit of gold is as a hedge which performs best when needed.

The Structure and Operation of the World Gold Market

O`Callaghan, Gary, "The Structure and Operation of the World Gold Market" (December 1991). IMF Working Paper No. 91/120

Abstract:

This paper describes the structure of the world gold market, its sources of supply and demand, and how it functions. The market has three principal functions in three major locations: the New York futures market speculates on spot prices, which are largely determined in London, whereas physical gold is in large part shipped through Zurich. The market is dominated by large suppliers and gold holders, including monetary authorities. Some unique characteristics of the gold market ensure confidentiality, and as a result, there are gaps in existing knowledge and data. The paper identifies and attempts to fill these gaps.

International Portfolio Formation, Skewness and the Role of Gold

Lucey, Brian M. and Tully, Edel, "International Portfolio Formation, Skewness and the Role of Gold" (September 2003)

Abstract:

This paper examines the optimal allocation of assets in well diversified equity based portfolio where the investor is concerned not only with mean and variance but also with the skewness of the returns. Beginning with an analysis of the rationale for concerning with skewness, the paper then discusses previous attempts to model multi-objective portfolio problems. The second part of the paper outlines the attractive nature of the gold asset in equity portfolios. The paper then integrates the two elements, showing the changes in portfolio composition that arise when not only skewness but gold are concerned.

Is Gold a Zero-Beta Asset? Analysis of the Investment Potential of Precious Metals

McCown, James Ross and Zimmerman, John R., "Is Gold a Zero-Beta Asset? Analysis of the Investment Potential of Precious Metals" (July 24, 2006)

Abstract:

Gold shows the characteristics of a zero-beta asset. It has approximately the same mean return as a Treasury Bill and bears no market risk. Silver also bears no market risk but has returns inferior to Treasury Bills. Both gold and silver show evidence of inflation-hedging ability, with the case being much stronger for gold. The prices of both metals are cointegrated with consumer prices, showing additional evidence of hedging ability.

Analysis of the Investment Potential and Inflation-Hedging Ability of Precious Metals

McCown, James Ross and Zimmerman, John R., (July 23, 2007).

Abstract

Gold and silver show strong evidence of ability to hedge stock portfolios and inflation during the period from 1970 to 2006. However, negative betas are only observed for the 1970s, suggesting that it is the inflation-hedging ability that is the cause of the stock-hedging ability. Both metals show high correlation with expected future inflation as measured by the TIPS spreads, confirming Greenspan's (1993) conjecture that gold prices are an indicator of expected inflation.