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What is the optimal weight for gold in a portfolio?

Author

Listed:
  • Brian M. Lucey

    (Trinity College Dublin
    University of Sydney Business School
    University of Economics Ho Chi Minh City)

  • Maurice Peat

    (University of Sydney Business School)

  • Aleksandar Šević

    (Trinity College Dublin)

  • Samuel A. Vigne

    (Trinity College Dublin)

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.

Suggested Citation

  • Brian M. Lucey & Maurice Peat & Aleksandar Šević & Samuel A. Vigne, 2021. "What is the optimal weight for gold in a portfolio?," Annals of Operations Research, Springer, vol. 297(1), pages 277-291, February.
  • Handle: RePEc:spr:annopr:v:297:y:2021:i:1:d:10.1007_s10479-019-03496-5
    DOI: 10.1007/s10479-019-03496-5
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    References listed on IDEAS

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    Cited by:

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    2. Rathi, Sawan & Mohapatra, Sanket & Sahay, Arvind, 2021. "Central bank gold reserves and sovereign credit risk," IIMA Working Papers WP 2021-03-02, Indian Institute of Management Ahmedabad, Research and Publication Department.
    3. Rathi, Sawan & Mohapatra, Sanket & Sahay, Arvind, 2022. "Central bank gold reserves and sovereign credit risk," Finance Research Letters, Elsevier, vol. 45(C).
    4. Echaust, Krzysztof & Just, Małgorzata, 2022. "Is gold still a safe haven for stock markets? New insights through the tail thickness of portfolio return distributions," Research in International Business and Finance, Elsevier, vol. 63(C).

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    More about this item

    Keywords

    Gold; Portfolio formation; Asset allocation;
    All these keywords.

    JEL classification:

    • C32 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Time-Series Models; Dynamic Quantile Regressions; Dynamic Treatment Effect Models; Diffusion Processes; State Space Models
    • F18 - International Economics - - Trade - - - Trade and Environment
    • F49 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Other

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