Quantifying

With kind permission from The British Museum This post is a continuation of an earlier post on the 23rd January in which I compared gold bullion with equities (Nasdaq Composite) as an investment. The results there showed that the statistics of the gold price were, surprisingly, very similar to those for the Nasdaq Composite. But the gold price has an almost zero correlation with equity prices. In this post I'm going to show that this makes gold a very valuable holding alongside equities in a diversified portfolio. As the picture above indicates gold has been used as a currency and store of value for millennia. Rome issued gold coins with art work that wouldn't be too out of place in mints today such as the  Royal Canadian Mint  which still issues coins for investment purposes. Modern finance has made it easier to invest in gold though, using instruments such as Exchange Traded Funds (ETF) which track the bullion price. ETFs are issued by major investment managers s...

Sources: LBMA, Nasdaq OMX Group Many investors hold a portfolio containing only equities. Some 'balanced' portfolios will be a mixture of equities and bonds (often only conventional though with no index-linked bonds). But what is the effect of holding gold in your portfolio? The legendary investor Warren Buffet has famously disdained gold because of its lack of usefulness. But you don't have to go far on the  Bank of England  website to find a profusion of information on the subject. They boast of the 400,000 bars of gold in their vault. I make that around $240 billion at a current price of $1500/troy ounce. That's a lot of money just sitting there looking at you. The chart above uses data taken from the US Federal Reserve database FRED. I've chosen to use the Nasdaq Composite because of the availability of data going back to the 1970s. This was a period of high inflation in which gold performed well but in subsequent decades it lagged. Still the chart cle...