Hedging basic materials equity portfolios using gold futures

Abstract

Commodities can be treated as an alternative investment, a hedging strategy, or a diversification opportunity. Various types of commodities, especially metals, usually are not strongly affected by inflation, and the trends of their prices are not correlated with other investment instruments. To participate in the metals area of the commodity market, an investor can buy shares of companies from the basic materials sector. Such companies are involved in discovering, developing, and processing raw materials. However, as not all the companies from the basic materials sector deal with precious metals, it is worth adding gold futures to such a portfolio. The aim of this paper is to compare a portfolio of the basic materials sector stocks against a similar portfolio hedged with gold. Our findings revealed that hedging a commodities’ portfolio with gold minimizes both profits and losses and can be suitable for risk-averse investors. The research results can be applied by individual investors and investment managers to choose the most appropriate investment approach.