Institutional Gold!

PGIM IAS

January 2019

In the current low interest rate environment, institutional investors have specifically inquired about investing in gold and the potential hedging benefits against inflation or an economic slowdown. Existing investment research on gold-related assets has produced conflicting results about the role of gold in institutional portfolios, partly the result of different time periods being examined. We find that gold has not performed particularly well long-term compared to other assets. However, there is a place for gold-related assets separate from commodities and energy equities.

In this piece, we examine the potential long-term role of gold in institutional portfolios, analyzing this question from three perspectives:

  • A hedge against inflation
  • A hedge against slow economic growth
  • A portfolio diversifier within a portfolio of financial assets (e.g., stocks and bonds).

Gold’s correlations to macroeconomic variables vary with both an investor’s investment horizon and historical data periods being examined. With respect to inflation, for both gold and gold-miner equity, the correlation to CPI increases depending on the length of the return horizon.

 

Correlations to CPI and CFNAI

The paper also discusses how institutions can invest in gold, the long-term performance of gold and its correlation to other institutional assets and macroeconomic variables, and the difficulties of estimating correlations, especially for long horizons.

 

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