Gold Hedging with a Mix of Assets

Abstract

This study examines hedging of gold with futures and put options. The hedging performance of 27 different volatility models are evaluated out of sample in both a volatility minimizing framework and utility maximizing framework to find the best performing hedging portfolio. The study finds that the EWMA model of RiskMetrics is the best volatility model for hedging gold. While the study may suggest further research into application of the utility maximizing framework, the evidence presented in this study shows that the volatility minimizing framework outperforms the utility maximization framework due to the simpler portfolio configuration. The study also finds the inclusion of put options into the portfolios as mostly detrimental to portfolio performance unless under specific assumptions.