Gold in Portfolio: A Long-Term or Short-Term Diversifier?

The purpose of this chapter is to evaluate the role played by gold in a diversified portfolio comprised of bonds and stocks. The continuous wavelet transform analysis is applied to capture the correlation features between gold and other risky assets at a specific time horizon to determine whether gold should be included in a diversified portfolio. This chapter uses the U.S. stock, bond, and gold data from 1990 until 2020 to investigate the optimal weights of gold obtained from the minimum variance portfolio. Empirical findings suggest that little evidence supports that gold acts as an efficient diversifier in traditional stocks and bond portfolios. Gold typically has been a long-term diversifier in the traditional port-folio comprised of bonds and stocks only before the early 2000s and acts as a short-term diversifier in times of crisis periods. The significant drop in the long-term weight of gold indicates that gold losses much of its long-term role in the diversified portfolio. These findings are useful for portfolio managers to justify the gold’s diversification benefits over different investment horizons.