What Is the Optimal Weight for Gold in a Portfolio?

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