Institutional Gold!

Abstract

We find that gold has not performed particularly well compared to other assets. However, there is a place for gold-related assets in institutional portfolios separate from commodities and energy equities. The role for gold lies in its diversification and macroeconomic hedging benefits. We examine the potential role of gold in institutional portfolios, analyzing this question from three perspectives – as a hedge against inflation, a hedge against slow economic growth, and as a portfolio diversifier within a portfolio of financial assets (e.g., stocks and bonds). Gold’s correlation with other financial assets and macroeconomic variables is sensitive to the investor’s horizon and time period, which explains why there are often conflicting views on gold in institutional portfolios. We discuss the difficulties of estimating correlations, especially for long horizons. We highlight the importance of measuring estimation uncertainty and how it can be incorporated into the portfolio construction process.