Another consideration for potential investors assessing the impact of gold on portfolio efficiency is the extent to which gold price variability is driven by broader market variability – in other words how much of the risk of investing in gold is driven by systematic risk.
Beta is a measure of an asset’s systematic risk – in effect how much of an asset’s volatility can be ‘explained’ (is caused) by the volatility of the broad market. A beta of 1 indicates that the asset’s price will move with the market. A beta of less than 1 indicates that the asset will be less volatile than the market. A beta of greater than 1 indicates that the asset’s price will be more volatile than the market.
In the chart below we plot the rolling two year beta of the Gold Basket versus VTI using the same monthly returns data as was used in the efficient frontier chart. For comparison we also plot the beta of gold priced in dollar terms versus stocks. The chart shows that while there has been variability in gold beta versus stocks it has consistently been below 1. Also of note the beta for Gold Basket has been below the beta for gold priced in dollars, over the reference period.
Using the ten year history of gold and equity prices as a guide we have constructed an illustrative efficient frontier for a stocks and bonds portfolio and a stocks, bonds and gold portfolio to show the relative impact on portfolio efficiency of adding gold. The data also show that over the same period the beta of Gold Basket versus stocks has been consistently below 1.
Source: Bloomberg LP; Treesdale Partners calculations. Past performance is not indicative of future performance