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Gold allocation in a Portfolio

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The allocation to Gold could improve a fund's performance?

1. Executive summary

"Gold. It's shiny, metallic, and melts easily into bars, coins, or jewelry. It doesn't rust, corrode, or decay. Gold is... well, golden" (Investopedia, 2021)

  • How does the performance of Gold (i.e. risk and returns) compare to the S&P 500 and the price of Bitcoin?

  • How does the inclusion of Gold change a portfolio's characteristics and can it help improve a portfolio's performance?

  • Could Bitcoin be used as a hedge against inflation?

  • Is Bitcoin replacing gold as a safe haven investment?

A note of caution: This analysis is entirely backward-looking, relying on past performance data. That's valuable information to help answer the questions above. At the same time, it shouldn't simply be extrapolated into the future. The observation period of the data (2014-2021) is relatively short, arguably not capturing a full business cycle. Inflation has been relatively low throughout most of this period. Meanwhile the period captures the initial stage of Bitcoin developing into a mainstream investment and attracting huge investor inflows. Behavior might differ significantly in the future. Thus before taking the final investment decision, we recommend complementing these findings with further forward-looking analysis.

import math
import numpy as np
import pandas as pd
from scipy.optimize import minimize
from pylab import plt
import seaborn as sns
plt.style.use('seaborn')
np.set_printoptions(suppress=True)
import cufflinks
cufflinks.set_config_file(offline=True)
%matplotlib inline
raw = pd.read_excel("Data_2.xlsx", index_col=0, parse_dates=True, engine="openpyxl")
symbols = ['BITCOIN', 'GOLD', 'CASH', '.SPX']
data = raw.loc["2015-01-01":"2022-02-28", symbols]

2. Exploratory analysis

rets = np.log(data / data.shift(1))  # daily log returns

Figure 1 - Returns

data.normalize().iplot(title="Assets normalized", color=["orange", "gold", "green","blue"], size=(10, 6))

Figure 1 shows strong outperformance of Bitcoin over the observation period. From January 2015 until February 2022 Bitcoin (47.71% p.a.) massively outperformed both gold (+4.68% p.a.) and the S&P 500 (7.35% p.a.)

Figure 2 - Returns w/o Bitcoin

data.normalize().iplot(title="Assets normalized", color=["orange", "gold", "green","blue"], size=(10, 6))



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