What Portfolio Theory Says about Investing in Gold
The comments below are an edited and abridged synopsis of an article by Logan Kane
Gold is a controversial asset class; however, efficient frontier models show that gold wins portfolio allocations for far greater amounts than the naïve expectation would be. Gold holds key investment advantages over other commodities; additionally, gold shows a positive skew in returns, meaning it tends to go up in value, rather than crash to the downside like equities. Central banks and smart people hold at least a small portion of their wealth in gold as a hedge.
Kane discusses the logic behind investing in gold; what efficient frontier models say about gold; the advantages of gold over other commodities; and the expected return of gold.
In conclusion, Kane says that gold is popular as a hedge with ultra-high net worth investors and central banks. His model shows a 5-7% allocation works well forprotecting principal against equity bear markets and inflation. If you live offof your investments, periods of high inflation will hurt both stocks and bonds. Gold gives you something to cash in, should equities and bonds go down at thesame time, to sustain your lifestyle without having to sell equities or bondsat unfavourable prices.
Gold can be overhyped by its most die-hard proponents, but the case for owning a little in a diversified portfolio is hard to ignore.