The combination of various factors means that adding gold to a portfolio can enhance risk-adjusted returns. Over the past decade, institutional investors with an asset allocation equivalent to the average US pension fund would have benefitted from including gold in their portfolio. Adding 2%, 5% or 10% in gold would have resulted in higher risk-adjusted returns. In fact, is has been found that gold increased the risk-adjusted returns of a hypothetical average pension fund portfolio.

Asset allocation analysis done by WGC indicates that, for US dollar- based investors, holding 2% to 10% in gold as part of a well-diversified portfolio can improve performance even more. Higher the risk in the portfolio, whether in terms of volatility, illiquidity or concentration of assets, the larger the required allocation to gold, within the range in consideration, to offset that risk. What is the optimal weight one should give gold in the portfolio? The analysis shows that gold’s optimal weight in hypothetical portfolios is statistically significant even if investors assume an annual return for gold between 2% and 4% – well below its actual long-term historical performance. Remember that gold goes beyond commodities. Gold is often lumped together with the commodity complex by investors and investment practitioners alike. Whether as a component in a commodity index (e.g., S&P Goldman Sachs Commodity Index, Bloomberg Commodity Index), one of the securities in an ETF, or as a future trading on a commodity exchange, gold is viewed as a part of this complex. Here is where investors need to be discerning.

Gold undoubtedly shares some similarities with commodities but one need to remember that the differences outnumber similarities. Let us look at some of them.

· Supply of gold is balanced, deep and broad, helping to quell uncertainty and volatility because gold is not consumed like typical commodities, its above-ground stocks are available for continuous utilisation

· Gold is used for multiple applications. For example gold is used for many purposes and purchased all around the world, reducing its correlation to other assets

· Gold is both a luxury good and an investment, resulting in more effective downside portfolio protection

· Gold’s unique attributes set it apart from the commodity complex. From an empirical perspective, including a distinct allocation to gold has improved the performance of portfolios with passive commodity exposures.