Key Determinants of Gold Price and testing for the optimal S&P 500/Gold allocation.

Abstract

In the light of an ever more intense discussion regarding the potential benefits of investing in physical gold, this study aims to provide investors with a deeper understanding for the fundamental drivers of gold price development, as well as give investors a fact-based approach on how gold investments can be incorporated in a stock market portfolio most optimally. By processing data gathered from a range of selected professionals with expertise within the field of gold, the result of this study reveals that the US Monetary Supply, Geopolitical risks and US real interest rates are deemed to be three key determinants of gold prices, giving unique insights regarding the expected characteristics of the market. Moreover, a portfolio analysis conducted on S&P500 (SPX) and gold price movements between 2008 and 2022, proved that the highest Sharpe Ratio obtainable for this gold/equity portfolio were to be reached if 30% of the portfolio would be allocated towards gold, greatly exceeding the suggested gold allocation of similar studies during other time periods.