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Portfolio impact of hedging exchange-raterisk and using goldAs we have seen, there is a compelling case for gold tocomplement a currency hedge on foreign investments,particularly emerging-market equities. However, the broadereffects of a gold allocation can only be analysed in the contextof other assets held by investors.Asset and period selectionWe analysed the impact on a typical portfolio of an emergingmarketcurrency strategy using gold. The portfolio describedin Chart 13 includes a 10% allocation to emerging-marketequities. 24 A complete list of the corresponding indices usedthroughout this study can be found in Table 4 in Appendix III.Based on data availability, and following similar methodologyto previous World Gold Council research, our analysis focusedon the period between 1987 and 2012. 25 However, from anemerging-market perspective, the period can be split into twodistinct parts.The first period, between 1987 and 2001, was characterised byemerging-market currency depreciation, at least two notableregional emerging-market crises and significant interest-ratedifferentials. This suggests foreign-exchange hedging wouldhave been a prudent choice for investors throughout this period,given depreciating currencies and violent currency swingsduring the crises. However, mitigating the case for hedgingwould have been the significant cost drag from executing ahedging strategy.Chart 13: Portfolio breakdown by asset classCash 5%US bonds 35%Global bonds 10%US equities 25%Developed world equities 10%Emerging market equities 10%Commodities 5%Source: Barclays, Bloomberg, J.P. Morgan, World Gold Council24 While a 10% allocation is indicative, the conclusions of this analysis can be adapted to different portfolio compositions depending on the asset allocationand the foreign asset exposure.25 These include Gold: hedging against tail risk, October 2010; Gold: alternative investment, foundation asset, October 2011; and The strategic case for goldfor UK investors, June 2012.Gold Investor | Risk management and capital preservation