The Case for Risk Managed Gold

Abstract

The strategic case for gold revolves around its long history as a store of value. Humans have been drawn to the yellow metal despite its inability to pay a dividend or provide productive output ownership since somebody first discovered it. From an investment perspective, gold has demonstrated an ability to provide a long-term source of uncorrelated returns while also serving as something of a "flight to safety" hedge during geopolitical or fiat instability periods. While there are plenty of speculators looking to gold as a source of potential outsized return, most of the investing public looks to gold at the intersection of those two objectives: risk management. The authors make the case that there is a risk premium for investing in gold, understanding that even though gold does not provide a stream of future cash flows paid out to investors, it has genuine utility as a store of value. The authors also explore the benefits of managing gold exposure in investment portfolios to manage large drawdowns through systematic momentum measures.

Keywords: Gold, Risk Managed, Downside Risk

JEL Classification: G10,G11,G19