The role of gold bullion in South African balanced portfolios

Abstract

The objective of this paper is to establish the structural features that gold bullion brings to South African global-balanced portfolios and to establish a strategic weight for this potential asset. We consider two methodological approaches based on a 40-year history to establish a strategic allocation weight for gold bullion. Our first approach considers the strategic role of gold bullion in South African global-balanced portfolios by using a mean-variance efficient frontier framework. We also implement a second assessment methodology that utilises a non-parametric optimisation procedure. We find from our efficient frontier analysis that the primary strategic role of gold bullion in a South African multi-asset portfolio is to add diversification and reduce portfolio risk (rather than enhance return). Whilst our mean-variance results differ slightly from our non-parametric results we ultimately find evidence in support of an allocation of 4% to gold bullion for South African balanced portfolios. This finding is consistent with findings in the international literature.

Gold Investment Incentives: An Empirical Identification of the Main Gold Price Determinants and Prognostication of Gold Price Future Trends

“…Markowitz's (1952Markowitz's ( , 1959 studies laid the foundations for practical assessment of the benefits gained from an investment portfolio diversification and proved that combination of a few categories of assets may significantly reduce portfolio value fluctuations (Vukovic & Prosin, 2018). The importance of gold as of an investment was highlighted by (Jaffe, 1989;Michaud et al, 2006;Conover et al, 2009;Riley, 2010;Baur, 2013;Bradfield, & Munro, 2016) and many others. The specific role of gold in diversification of portfolio investment was analysed by (Sherman, 1982;Adrangi et al, 2000;Smith, 2002;Liu, & Chou, 2003;Davidson et al, 2003;Lucey, Tulley, 2006 a,b;Ibrahim, 2012;Makiel, 2015;Brycki, 2015;Bundrik, 2016;Yu, H.-C., Lee, C.-J.…”