Should gold be included in institutional investment portfolios?

Abstract

After many years in the investment wilderness, gold investing has come back into fashion. We explore whether including gold does indeed improve institutional investment portfolios and which form of gold performs best. We do this by updating and extending Jaffe (1989), who found clear evidence in favour of including a small allocation to gold. We show that data from the 1980s and 1990s would have suggested avoiding gold investing completely. However, data from the 2000s once again provides evidence for including some gold in investment portfolios. Our analysis shows that the case for gold investing has become especially strong since the financial crisis in 2007. We attribute this shift primarily to changes in inflation expectations. We find that gold bullion almost always produces better portfolio risk-adjusted returns than alternative forms of gold investment.

Keywords:

• gold
• ETFs
• asset allocation
• institutional investor

JEL Classification:

• F36
• G14
• G15

Notes

1 ¹ We use the Barclays Long US Government bond index return as our proxy for the risk-free rate.