Tactical Asset Allocation to Gold

Abstract

This paper finds a strong correlation between deviations in the once widely popular Fed model to the price of gold. A simple tactical asset allocation strategy can be implemented. Empirical test of the model show the implicit timing signals to be statistically significant. The degree of accuracy, including the month gold peaked in 1980, can be an extremely valuable asset for portfolio managers looking for positive alphas. Of course, building an investment theory based on one component (Fed model) can be perilous; this paper will also look at the DJIA to gold ratio as a relative value assessment.

Keywords: Gold, fed model, tactical asset allocation, alpha, bullion, portfolio manager