Gold - Fundamental Drivers and Asset Allocation

Abstract

In this paper we perform a theoretical and econometric analysis of the fundamental drivers of gold. We demonstrate that gold is significantly influenced by inflation changes, interest rates, currency changes and central bank reserve policies. A key finding is that the influence of the drivers varies through time, e.g. inflation is a major driver in the 1970s and in the late 2000s but not in the 1980s and 1990s. We also examine the role of gold in asset allocation and show that gold can significantly enhance the risk-reward ratio in a portfolio comprised of stocks, bonds and cash. We argue that there are several factors that have the potential to support a historically high price of gold.

Keywords: gold, fundamental drivers, risk factors, gold in asset allocation, gold standard