Adding Gold To An Equity Portfolio

Introduction:

Using correlation and regression analysis, we learned in a previous article that monthly returns of gold since 1979 have not been statistically correlated with U.S. inflation or equities as represented by the CPI-U and the S&P 500 index, respectively. And using long term price charts, we learned in another article that the long term trend in gold prices has been strongly related inversely to the secular trend in equities.

In this article, we will examine the effect of adding gold to a diversified equity portfolio using another statistical tool, mean-variance analysis.

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Relationship Between Gold, Inflation, and Equities II

Introduction:

In part-1 of this study, we considered the question of whether monthly returns of gold were correlated with those of inflation or equities in the United States of America. We analyzed three decades of monthly returns using two statistical techniques, correlation and regression analysis. Were you surprised by the results?

Here in part-2 we will investigate whether there has been a relationship between the long term price trends of gold, inflation, and equities. But before we do, let us first clearly distinguish between “correlation of returns” and “price trends“.

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Relationship Between Gold, Inflation, and Equities

Introduction:

No doubt you have often heard it stated as a matter of fact that gold is a hedge against inflation or, what may at first glance seem synonymous, that gold is correlated with inflation. Have you wondered to what degree this may be true, if it is true at all? Perhaps curiosity about gold has been piqued in light of recent record gold prices coupled with economic conditions in general.

In this first of two articles we will assemble and analyze data describing the statistical correlation between the monthly returns of gold, inflation, and equities. And in part-2 of this study we will compare the long term price trends of gold, inflation, and equities. Read more »