martedì 27 ottobre 2009

Gold, the only means of effective portfolio diversification

In the commodity world a special place must be reserved for gold because of its peculiarities, which make it a must-own asset for many investors.
As mentioned in the post How many risks behind commodities, gold is one of the few raw materials with a very low correlation with the stock market - a correlation that has not increased sharply over the past two years. Therefore gold is the only asset that seems to still be able to provide the necessary diversification within a portfolio. The peculiarity of gold has also been underlined by two IMF economists, Roache and Rossi, in a study published in July 2009 ("The effects of economic news on commodity prices: Gold is just another commodity?"). The two economists have discovered that gold is the only commodity to respond to major macroeconomic data published in the U.S. and Euro area and that such movements are counter-cyclical, in line with its status as a safe haven. Gold should also defend the portfolios both in case of a surge in inflation, as it happened in the '70s, and of deflation, as it happened in the '30s. However, the ability of gold as having a positive impact on the portfolios of European investors could be severely limited by the performance of the Euro/US Dollar. The recent rise in the bullion, in fact, has been accompanied by an increase in the single European currency. Although gold has hit a record high above $1,000 an ounce, for European investors this is still almost 9% below the record high set in March. Buying gold could be a rewarding choice in the long run should the crisis of the last two years not be fully overcome or inflationary pressures increase but in the near term, investing in gold might turn out to be disappointing for European investors.

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