This is a presentation I gave for the CFA institute in Dublin in the summer of 2011. My conclusions are that adding almost anything negatively correlated with equities to a portfolio should improve efficiency. BUT for gold to work you need two things 1) Luck - you need to buy when prices are...
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The problem is that commodities, whilst an input into production costs, are not a good hedge against inflation
The correlation isn't particularly strong
The rate of inflation tends to be quite stable from month to month, whereas the spot price of commodities, gold in this example, is all over the shop
We see a very similar picture with the Goldman Commodity index
Historically at least the most reliable hedge has actually been short term fixed interest
Described by Nobel Laureate Gene Fama as "an inflation hedge fund"
To pick up the term premium use short term (1 to 5 year) fixed interest
Marc Westlake
Chartered Certified and European Financial Planner www.globalwealth.ie