Analysis of Individual Investor’s Preference and Portfolio Risk-Return for Gold as an Asset Class

Author(s)

Charmi Shah

Affiliations

IFIM Business School, Bangalore, India

Abstract

As per tradition, In India, gold was seen only as a symbol of security and a sign of prosperity. In the traditional Indian culture, gold was an integral part of daily life where purchases of gold jewellary were only considered as a form of a liquid asset.

Since last few years, the Indian retail investment market was one of the strongest in the world. Demand increased substantially by 264% to 93 tonnes in this period and accounted for 25% of total domestic gold demand.

India’s gold ETF market has also enjoyed further growth in recent quarters. Total holding amounted to 11 tonnes by the end of August 2013, up 77% from the same period last year. There are basically three ways to invest in gold, first the most popular way is to buy physical gold, second to do trading in gold futures contracts, third to invest into Gold ETF mutual funds.

In this paper, researcher has tried to compare all the forms of gold investment with each other and also tried to construct portfolio that will consist of all the forms of gold avenues and analyzed portfolio risk and return.

Researchers have also carried out primary survey to know investor’s preference for Gold as an investment avenue and the form in which they would like to invest in gold.

The findings reveal detailed analysis of all the forms of gold investment along with pros and cons, risk-return perspective of holding gold in the portfolio, and feasibility of gold as a hedging tool.

Keywords

Gold ETF, Gold Futures, Risk-Return Analysis, Perception.

References

1. NCAER survey, (1964), “Attitudes towards and motivations for saving”, New Delhi.
2. Hamao, Y., Masulis, R.W. and Ng, V. (1990), “Correlations in price changes and volatility across international stock markets”, The Review of Financial Studies, Vol. 3, No. 2, pp. 281–307.
3. Zvi Bodie and Dwight Crane (1997), “Personal investing: Advice, theory and evidence”, Financial Analysts Journal, Vol. 53, No. 6, pp. 13–23.
4. Chan, H. and Faff, R. (1998), “A multifactor model of gold industry stock returns: Evidence from the Australian equity market”, Applied Financial Economics, Vol. 8, pp. 22–28.
5. Shobana, V.K. and Jayalakshmi, J. (2009), “Investor awareness and preferences”, Organisational Management, Vol. XXII, No. 3, pp. 16–18.
6. Jaffe, J. (1989), “Gold and gold stocks as invest- ments for institutional portfolios”, Financial Analysts Journal, March–April, pp. 53–59.
7. Brian, M. Lucey and Edel, Tully (2006), “Seasonality, risk and return in daily COMEX gold and silver data”, Applied Financial Economics, Vol. 16, Issue 4.
8. James Ross McCown of Meinders (2006), “Is gold a zero-beta asset? Analysis of the investment potential of precious metals” at School of Business, Oklahoma City University.
9. Mitchell Ratner and Steven Klein (2008), “The portfolio implications of gold investment”, The Journal of Investing Spring, Vol. 17, No. 1, pp. 77–87.
10. Baur, D.G. and Lucey, B. (2010), “Is gold a hedge or a safe haven? An analysis of stocks, bonds and gold”, Financial Review, Vol. 45, Issue 2, pp. 217–29.
11. Batten, J.A. and Lucey, B.M. (2009), “Volatility in the gold futures market”, Applied Economics Letters, 17(2), pp. 187–90.
12. Caballero, R.J., Farhi, E. and Gourinchas, P.O. (2008), “Financial crash, commodity prices and Global imbalances (No. w14521)”, National Bureau of Economic Research, Vol. 99, pp. 1–55.
13. Ghosh, D., Levin, E.J., Macmillan, P. and Wright, R.E. (2004), “Gold as an inflation hedge?”, Studies in Economics and Finance, 22(1), pp. 1–25.
14. Tully, E. and Lucey, B.M. (2007), “A power GARCH examination of the gold market”, Research in International Business and Finance, 21(2), pp. 316–25.
15. Baur, D.G. and B.M. Lucey (2010), “Is gold a hedge or a safe haven? An analysis of stocks, bonds and gold”, The Financial Review, 45, pp. 217–29.
16. Haga, R. and Lindset, S. (2012), “Understanding bull and bear ETFs”, The European Journal of Finance, Vol. 18, pp. 149–65.
17. Gallagher, D.R. and Seagara, R. (2006), “The performance and trading characteristics of exchange traded funds”, Journal of Investment Strategy, Vol. 1(2), pp. 49–60.