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Is Gold a Zero-Beta Asset? Analysis of the Investment Potential of Precious Metals

Last Updated on 10 February, 2024 by Rejaul Karim

In the paper “Is Gold a Zero-Beta Asset? Analysis of the Investment Potential of Precious Metals,” James Ross McCown of the University of Oklahoma and John R. Zimmerman of Oklahoma City University delve into the intriguing dynamics of precious metals as investment assets.

The research posits that gold exhibits the characteristics of a zero-beta asset, with a mean return comparable to Treasury Bills and minimal market risk. Likewise, silver is identified as carrying no market risk but with returns inferior to Treasury Bills.

Moreover, the study presents compelling evidence of the inflation-hedging ability of both gold and silver, with gold particularly demonstrating strong potential in this regard. The cointegration of the prices of these metals with consumer prices offers further support for their hedging capabilities.

This research not only sheds new light on the investment potential of precious metals but also provides valuable insights for investors seeking to diversify their portfolios and hedge against inflation.

Abstract Of Paper

Gold shows the characteristics of a zero-beta asset. It has approximately the same mean return as a Treasury Bill and bears no market risk. Silver also bears no market risk but has returns inferior to Treasury Bills. Both gold and silver show evidence of inflation-hedging ability, with the case being much stronger for gold. The prices of both metals are cointegrated with consumer prices, showing additional evidence of hedging ability.

Original paper – Download PDF

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Author

James Ross McCown
University of Oklahoma – Division of Finance; Toltec Group

John R. Zimmerman
Oklahoma City University

Conclusion

In conclusion, the research by James Ross McCown and John R. Zimmerman provides substantial evidence regarding the investment potential of precious metals, particularly gold and silver. The identification of gold as a zero-beta asset, exhibiting similar mean returns to Treasury Bills and minimal market risk, offers compelling insights for investors and portfolio managers seeking to diversify their assets.

Similarly, the findings regarding silver, while indicating inferior returns to Treasury Bills, underscore its lack of market risk. Moreover, the study’s demonstration of the inflation-hedging ability of both gold and silver, with gold particularly showcasing stronger potential in this regard, offers valuable implications for investors aiming to hedge against inflationary pressures.

The cointegration of the prices of these metals with consumer prices provides additional evidence of their hedging capabilities, further supporting their role as viable assets for investment diversification.

This research not only contributes to the understanding of precious metals as investment vehicles but also presents practical implications for investors and portfolio managers navigating complex market dynamics.

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Benchmarking Commodity Investments

FAQ

Q1: What does the research suggest about gold as a zero-beta asset, and how does it compare to Treasury Bills?

A1: The research suggests that gold exhibits the characteristics of a zero-beta asset, indicating minimal market risk. Gold is found to have a mean return comparable to Treasury Bills, making it an asset with low market risk and similar average returns to a traditional risk-free investment.

Q2: What evidence does the study provide regarding the inflation-hedging ability of gold and silver?

A2: The study offers compelling evidence of the inflation-hedging ability of both gold and silver. Gold, in particular, demonstrates strong potential in hedging against inflation. The cointegration of the prices of these metals with consumer prices provides additional support for their effectiveness as hedges against inflationary pressures.

Q3: How does the research characterize silver as an investment asset, and what key features distinguish it in terms of market risk and returns?

A3: The research characterizes silver as carrying no market risk but with returns inferior to Treasury Bills. While silver lacks market risk, its returns are found to be less favorable compared to Treasury Bills. The study provides insights into the distinct features of silver as an investment asset, contributing to a comprehensive understanding of its role in diversified portfolios.

You can find many more Research Papers here

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