Portfolio Design: A Modern Approach to Asset Allocation

DOES GOLD BELONG IN THE PORTFOLIO?

For millennia, gold has been considered the ultimate store of value. So does it deserve a place in a modern portfolio? To answer that question, consider the return on the GSCI Gold index, a sub-component of the Goldman Sachs commodity futures index. Like the overall GSCI index, the return on the GSCI Gold index is derived from passive investment in futures contracts, in this case the futures contract tied to the London gold price (which is quoted in dollars).10 This gold index is available beginning in 1979.

Table 12.6 reports returns on the GSCI Gold Index as well as other assets. From 1979 to June of 2009, gold earned a compound return of 4.6 percent compared with a return of 7.2 percent on the GSCI index as a whole. The gold index is as volatile as the GSCI, so the Sharpe ratio for the gold index is much smaller at 0.04. Neither commodity index, moreover, can compare with stocks over this sample period. The compound return on the S&P is 6.3 percent above the gold return and with a lower volatility.

TABLE 12.6 Returns on Gold and Other Assets, Jan 1979–Jun 2009

Data Sources: S&P and MSCI for commodity indexes and stock returns. The gold price (from London) is from the IMF, International Financial Statistics.

The GSCI Gold index is the return on futures contracts. Could an investor do better holding the metal itself? Table 12.6 also reports the ...