Mining’s old guard needs strong medicine
A new report details subpar investor returns in the mining industry over the last decade, particularly big cap diversified companies which have not adapted to new realities.
With the continued upswing in the price of gold many investors are once again either wondering if they should buy, sell, or hold the metal in their investment portfolios. This article will examine the contributions made by the gold asset class to an investment portfolio allocated according to Modern Portfolio Theory (MPT).
Used by many fund managers and investment professionals, MPT allocates asset classes according to a desired average rate of return while simultaneously minimizing portfolio risk. Risk can be looked at as fluctuations in portfolio returns; in MPT, risk is measured by a statistical term called the standard deviation.
Because of the broad scope, this discussion is broken up into two parts. In the first part, we’ll compare allocations, returns, and risk in portfolios where gold is included to those portfolios where it isn’t. This comparison will tell us to what extent gold is meaningful as an asset class in a diversified portfolio with a long investment horizon.
In part two, we’ll revisit an article written a couple of years ago to see what effect the recent rally in gold has had on long term returns. We’ll examine it using traditional MPT assumptions and compare the results to those obtained by adding the extra dimension of optimized market timing to see how we can actually decrease risk while increasing returns.
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