Gold in Portfolio: A Long-Term or Short-Term Diversifier?

Fu-Lai Lin, Sheng-Yung Yang and Yu-Fen Chen

Chapter 21 in Handbook of Investment Analysis, Portfolio Management, and Financial Derivatives:In 4 Volumes, 2024, pp 749-773 from World Scientific Publishing Co. Pte. Ltd.

Abstract: The purpose of this chapter is to evaluate the role played by gold in a diversified portfolio comprised of bonds and stocks. The continuous wavelet transform analysis is applied to capture the correlation features between gold and other risky assets at a specific time horizon to determine whether gold should be included in a diversified portfolio. This chapter uses the U.S. stock, bond, and gold data from 1990 until 2020 to investigate the optimal weights of gold obtained from the minimum variance portfolio. Empirical findings suggest that little evidence supports that gold acts as an efficient diversifier in traditional stocks and bond portfolios. Gold typically has been a long-term diversifier in the traditional port-folio comprised of bonds and stocks only before the early 2000s and acts as a short-term diversifier in times of crisis periods. The significant drop in the long-term weight of gold indicates that gold losses much of its long-term role in the diversified portfolio. These findings are useful for portfolio managers to justify the gold’s diversification benefits over different investment horizons.

Keywords: Financial Accounting; Financial Auditing; Mutual Funds; Hedge Funds; Asset Pricing; Options; Portfolio Analysis; Risk Management; Investment Analysis; Momentum Analysis; Behavior Analysis; Futures; Index Futures; CDCs; Financial Econometrics; Statistics; Financial Derivatives; Financial Accounting (search for similar items in EconPapers)
JEL-codes: G1 G11 G12 G3 M41 M42 (search for similar items in EconPapers)
Date: 2024
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