Is Gold Good for Portfolio

Diversification?

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Portfolio diversification refers to reducing investment risk by

purchasing a variety of assets 1. A random selection of assets

already reduces risk, However, diversification is more efficient, if

the portfolio assets are not correlated, i.e. they do not move into the same direction. Investors

seek a portfolio that has a minimum of risk and a maximum

of return2. compared to a one-asset

investment

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1. Gold is mostly uncorrelated with most other assets and moves independent of key economic

indicators2. This makes it a good

diversification opportunity in portfolios

3. Studies show portfolios containing gold are more robust

and better able to deal with market uncertainties (Jeffrey &

Jaffe 1989, FAJ)

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1. It is suggested that 5% to 15% of the investment portfolio should

contain this precious metal. Since the beginning of 2000, gold has been a valuable portfolio asset

2. However, before 2000, gold was an attractive portfolio asset only

between 1974 and 1979 and 1993 and 1999

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Even though gold is a good portfolio diversifier, the question is whether it

outpaces a broader mix of commodities, or a purely non-

commodity portfolio

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1. Larry Swedroe from Buckingham Asset Management compares the annual return of three diversified

portfolios2. 1. a non-commodity portfolio3. 2. A portfolio with a mix of

commodities4. 3. a portfolio with gold

5. From 1970 until 2010 the annual returns of these portfolios were

11.36%, 11.32% and 11.29% resp.

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1. Once can see that the three portfolio types offer very similar returns, with the gold portfolio

even the lowest2. Therefore, it can be concluded

that though gold is a reasonable portfolio

diversifier, there are exist equal other options

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