Institutional investors are right to evaluate adding gold-related assets to a diversified portfolio at times of a slowing growth environment, according to new PGIM research.
PGIM’s study said that gold had a clear role to play in a stagnation economic scenario and, in addition, gold’s hedging effectiveness with other asset classes with inflation and growth varied with an investor’s horizon.
“Gold’s correlations are sensitive to the time period and the investor’s horizon. For example, gold has a negative correlation to equity returns, even at the 90th percentile, over 5-year investment horizons,” Harsh Parikh, principal and a senior analyst in PGIM’s institutional advisory and solutions group, said.
“Gold was diversifying to Treasuries due to its negative correlation, which became more negative as the investor’s investment horizon increased. Additionally, gold-related assets have a positive correlation to CPI, increasing over the time horizon, and a negative correlation to economic activity, which further decreased over the time horizon.”
Following this, the allocation to gold-related assets in hedging portfolios would depend on both the investor’s objective (protection against inflation or slow growth) and investment horizon.
“While we illustrate gold’s role in add-on hedging portfolios, there may be more efficient alternatives to achieve a desired portfolio-level macroeconomic sensitivity,” Parikh said.
At the same time, speaking of difficulties of estimating correlations for long horizon, he said that it would be important for investors to measure estimation uncertainty and see how this uncertainty can be incorporated into the portfolio construction process.
