Diversification Effect of Investing in Gold

Abstract

With the start of the financial and economic crisis that hit the whole world, including Croatia, there is an increasing number of investors who increased their interest in gold. Investing in gold has always been considered a safe haven in times of crisis, when it is supposed to ensure the protection of investors' wealth. The aim of this study is to test the diversification effect of investing in gold on the example of the Republic of Croatia for the period from 2010 to 2015. However, unlike similar international studies that have this problem approached from the point of view of the big investors who have at their disposal various forms of investment in gold and gold- covered securities, the emphasis in this study will be on the aspect of the small investors. Small investors are those who invest smaller amounts of money in securities and do not make it at the professional level. Experience in the Republic of Croatia has shown that with the appearance of the financial crisis, a large number of such small investors simply „disappeared“ from the financial market. In this regard, a conducted study proved that the involvement of investment gold in a portfolio of a small investor exposed to money, bonds and equity markets, and through the application of modern portfolio theory, achieved the desired diversification effect. However, the strength of this effect is not equally distributed across all levels of risk exposure. The diversification effect will mostly affect those investors who are exposed to higher levels of risk which is a new finding in terms of its application at the level of personal finance.