This report examines gold's role within a sterling-denominated investment portfolio. It uses the respected Michaud et al.'s unique Resampled Efficient Frontier™ optimisation technology to allow analysis of the statistical significance of gold for adding diversification value. The report shows how gold performs as a portfolio diversifier, a preserver of wealth and a risk management mechanism, which is particularly important during times of economic and market stress.
A UK investor holding assets such as cash, bonds, equities, property and commodities can enhance a portfolio by adding a discrete allocation to gold as a strategic asset.
Gold’s characteristics allow it to play many roles within an investor’s portfolio. It serves as a portfolio diversifier, a preserver of wealth and a vehicle to manage risk more effectively, particularly against tail risks. In this paper, we show that gold provides the means for investors to reduce cross-asset correlation and, by extension, portfolio risk. Using an optimisation framework developed by Michaud et al., we analyse gold in the context of a sterling-based investor’s portfolio to determine its optimal allocation and risk-hedging characteristics.
In focusing on sterling-based portfolios we aim to:
- Provide an insight into how an optimal allocation to gold can benefit UK investors during periods of economic and market stress.
- Add further support to previous findings for sterling-based investors and the existing body of similar research in other currencies.
- Discuss further uses of gold as a risk-management mechanism for sterling-based investors.