# Is Gold a Stock-Bond Diversifier (Part 2)?
Source: https://www.yieldcurve.pro/blog/is-gold-a-diversifier-part-2  
Published: 2023-11-12  
Tags: Bond Beta, Bonds, Diversification, ETFs, GLD, Gold, IEF, IEI, SHV, SHY, SPY, Stock Beta, Stocks, TLH, TLT

_Does adding gold to traditional stock-bond portfolios provide diversification?  The answer is it depends._

# Does adding gold to traditional stock-bond portfolios provide diversification (Part 2)?

<br />

In our
<a href="/blog/is-gold-a-diversifier">last</a>
blog post we considered the following simple framework to determine the
extent to which gold did or did not diversifying a classic portfolio of
equities and Treasuries:

<br />

<!-- prettier-ignore-start -->
$$
r_{gt} - r_f = \alpha_g + \beta_{m}\left(r_{mt} - r_f\right) +
\beta_{b}\left(r_{bt} - r_f\right) + \epsilon_{gt} \qquad\qquad\qquad\qquad (1)
$$
where
$$r_{gt} := \text{gold return}$$
$$r_{mt} := \text{stock market return}$$
$$r_{bt} := \text{bond market return}$$
$$r_f := \text{risk free rate}$$
$$\alpha_g := \text{intercept}$$
$$\beta_{m} := \text{stock market exposure}$$
$$\beta_{b} := \text{bond market exposure}$$
<!-- prettier-ignore-end -->

<br />

The determination of that simple study was that gold can add diversification
depending on the tenor of the Treasuries added to the portfolio.  To quantify
the effect we begin with the same basic set of readily available ETFs as
proxies for gold, cash, and stocks shown in Table 1.

<br />

| Ticker   | Description            | Asset Class |
| :------: | :--------------------- | :---------- |
| GLD      | Russell 1000           | Gold        |
| BIL      | 1-3 Month T-Bill       | Cash        |
| SPY      | S&P 500                | Stocks      |


<br />

#### **Table 1**:  ETF Proxies for Gold, Cash, and Stocks

<br />

To capture the different Treasury tenors we utilize the ETFs
shown in Table 2.

<br />

| Ticker   | Description            | Asset Class |
| :------: | :--------------------- | :---------- |
| SHV      | 1-12 Month Treasury    | Bonds       |
| SHY      | 1-3 Year Treasury      | Bonds       |
| IEI      | 3-7 Year Treasury      | Bonds       |
| IEF      | 7-10 Year Treasury     | Bonds       |
| TLH      | 10-20 Year Treasury    | Bonds       |
| TLT      | 20+ Year Treasury      | Bonds       |

<br />

#### **Table 2**:  ETF Proxies for Bonds

<br />

The resulting Bond and Stock exposures are shown in Figure 1.

<br />

<img src="/admin/blog/image/60/blog_gold_beta_etfs_20231112.png">
#### **Figure 1**:  Gold Exposures to Bond ETFs Varying by Tenor

<br />

The Bond exposure is a monotonically decreasing function of tenor.
Also, gold's Stock exposure is relatively muted compared to Bonds.

What does this simple analysis say?  Essentially, it says that gold is a
relatively good diversifier for a traditional stock-bond portfolio as
long as the bonds are have tenors of about 20+ years.

Investors should be targeting **TLH** and **TLT** as the bond
component of their portfolios if they plan to derive any diversification
benefits from adding **GLD**.