What Is the Optimal Weight for Gold in a Portfolio?

16 Pages Posted: 18 Dec 2018

See all articles by Brian M. Lucey

Brian M. Lucey

Trinity Business School, Trinity College Dublin; Abu Dhabi University - College of Business Administration; Shanghai Lixin Univeristy of Accounting and Finance

Maurice Peat

The University of Sydney; Financial Research Network (FIRN)

Samuel Vigne

Trinity College (Dublin) - Trinity Business School

Date Written: November 28, 2018

Abstract

We show that the statistical properties of gold are negatively correlated with equities and that including Gold in a portfolio will provide diversification benefits. As there is no consensus on the proportion of gold that should be included in a strategic portfolio allocation we propose a visual tool that associates a performance metric with a range of possible asset weighting schemes; a Sharpe ratio response surface. This very surface shows that a target performance metric can be achieved with a large number of different allocations. We further argue that the rebalancing approach based on the surface closest to the benchmark surface under the Hausdorrf distance metric should be selected. Using a data sample between 1990 and 2018, we find that annual rebalancing with a 44 week lookback period achieves the minimum distance from the benchmark surface.

Keywords: Gold, portfolio formation, asset allocation

JEL Classification: C32, F18, F49

Suggested Citation

Lucey, Brian M. and Peat, Maurice and Vigne, Samuel, What Is the Optimal Weight for Gold in a Portfolio? (November 28, 2018). Available at SSRN: https://ssrn.com/abstract=3292013 or http://dx.doi.org/10.2139/ssrn.3292013

Brian M. Lucey (Contact Author)

Trinity Business School, Trinity College Dublin ( email )

The Sutherland Centre, Level 6, Arts Building
Dublin 2
Ireland
+353 1 608 1552 (Phone)
+353 1 679 9503 (Fax)

Abu Dhabi University - College of Business Administration ( email )

PO Box 59911
Abu Dhabi, Abu Dhabi 59911
United Arab Emirates

Shanghai Lixin Univeristy of Accounting and Finance ( email )

Shanghai
China

Maurice Peat

The University of Sydney ( email )

University of Sydney
Sydney, NSW 2006
Australia

Financial Research Network (FIRN)

C/- University of Queensland Business School
St Lucia, 4071 Brisbane
Queensland
Australia

HOME PAGE: http://www.firn.org.au

Samuel Vigne

Trinity College (Dublin) - Trinity Business School ( email )

Aras an Phiarsaigh
College Green
Dublin, Leinster D2
Ireland

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