Although gold has been around for thousands of years, its role in diversified portfolios is not well

understood. While institutional and individual investors own most of the outstanding supply of stocks and
bonds, only 20% of the outstanding supply of gold is with investors. The goal of the article is to study the
role of gold in asset allocation.
There are six different arguments advanced for owning gold:
Gold serves as a currency hedge
Gold provides an inflation hedge
Gold is an attractive alternative to assets with low real returns
Gold is a safe haven in times of stress
Gold should be held because we are returning to a de facto world gold standard
Gold is under owned
Gold as an inflation hedge:
Historically, gold has been a poor inflation hedge in the short run, though it has been a good inflation
hedge
in
the
long
run.
The variability of real price of gold shows that it has been a poor short-term inflation hedge. It might be a
good inflation hedge in the long-run, however the period might be longer than an investors life span or
investment horizon.
Gold as a currency hedge:
There are two ways to interpret this. First, gold is a foreign exchange currency hedge. Second, gold as a
hedge for ones own currency.
First arguments works only when the inflation rates for both the countries is zero, and second argument
is just another way of expressing golds inflation hedge quality. Hence gold does not seem to be a currency
hedge.
Gold as an alternative to Assets with low real returns:
There has been a correlation between real price of gold and the level of interest rates. Many reasons are
suggested for this type of behavior, however, no reason can be chosen with certainty.
Gold as a safe haven:
To be a safe haven, an asset needs to have two characteristics: Stable value during times of stress, and it
can be accessed during times of stress.
However, findings suggest that gold may not be a reliable safe haven asset during periods of financial
markets stress. Although gold is viewed by many as durable and largely imperishable characteristics that
make gold its own safe haven against the ravages of the world - it is not necessarily a safe haven for the
owner of the gold.
De facto gold standard:
De facto gold standard argument is just another version of the gold-as-an-inflation-hedge argument,
and if the gold-as-an-inflation-hedge argument provides no explanation for the high real price of gold,
then it is reasonable that the de facto gold standard argument does little to explain variation in the real
price of gold.
Two reasons for keeping gold in a diversified portfolio:
Gold has low correlations with other tradable assets.
According to one of the key insights of CAPM, one should hold a market portfolio