The role of gold bullion in South African balanced portfolios

Abstract

The objective of this paper is to establish the structural features that gold bullion brings to South African global–balanced portfolios and to establish a strategic weight for this potential asset. We consider two methodological approaches based on a 40-year history to establish a strategic allocation weight for gold bullion. Our first approach considers the strategic role of gold bullion in South African global–balanced portfolios by using a mean-variance efficient frontier framework. We also implement a second assessment methodology that utilises a non-parametric optimisation procedure. We find from our efficient frontier analysis that the primary strategic role of gold bullion in a South African multi-asset portfolio is to add diversification and reduce portfolio risk (rather than enhance return). Whilst our mean-variance results differ slightly from our non-parametric results we ultimately find evidence in support of an allocation of 4% to gold bullion for South African balanced portfolios. This finding is consistent with findings in the international literature.

Keywords:

• Gold Bullion
• Asset Allocation
• Efficient Frontier
• Mean-Variance Optimisation
• Non-Parametric Optimisation
• Tactical Asset Allocation
• Economic Regimes

Acknowledgements

The authors wish to thank BNP Paribas Cadiz Securities for their support with writing this paper.

Disclosure statement

No potential conflict of interest was reported by the authors.