Gold as Portfolio Insurance
For thousands of years, gold has been valued as a form of currency and a means of holding value. Today gold remains a highly valued asset, helping to strengthen many investment portfolios. Investors tend to buy gold as a hedge against economic risks including high inflation, changing monetary policies, and geopolitical turmoil such as wars. Gold is considered a “safe haven” asset that will often increase in value when stock markets fall. While gold will usually outperform other asset classes during periods of economic turmoil, during periods of strong economic growth and stable inflation, gold will often underperform.1 Gold is thus best seen as an investment to hedge against negative returns in a highly volatility economy as opposed to a high-growth returning asset. Most financial experts suggest investors maintain a portion of gold in their investment portfolio between 5% – 25% to provide diversification and act as a hedge against inflation and economic uncertainty.
Characteristics of Gold as an Investment Asset
Gold has several attributes that distinguish it from most other financial assets. To start, gold is a finite, global, mineable commodity with a supply that increases slowly over time. In fact, gold mining operations add only about 1.5% more gold each year to the quantity of gold that exists above ground, meaning increasing the supply of gold is highly restrictive compared to increasing the supply of fiat currencies.2 Second, from a financial and economic point of view, gold carries no default risk. Nor does the value of gold rely on the promises of an issuer.3 These characteristics make gold a readily accepted and liquid commodity of exchange as well as a strong hedge to protect wealth during times of economic instability. Though gold functions in many ways different from stocks and bonds,4 if it is allocated properly, it can serve to diversify your financial holdings and help to protect the value of your investment portfolio.
Historical Performance of Gold
Over the long term, gold has yielded strong investment returns, though across the same time span, the returns from investing in gold have been lower than the returns from investing in equities. Since the early 20th century, stocks, on average, have yielded annual returns of about 9 – 10% per annum compared to gold which has yielded annual returns of about 5%.5 Gold, however, offers additional value in its price stability and in its ability to hedge against market instability.
During the 1970s, runaway inflation resulting from the collapse of the Bretton Woods system and massive oil shocks in the Middle East caused the price of gold to rise approximately 20-fold.6 The huge increase in the price of gold was driven first by the “Nixon shock” in 1971 when the U.S. and the world monetary system moved away from the gold standard to fiat currency regimes. Gold saw further increases later in the decade as inflationary pressures multiplied from conflicts in the Middle East that disrupted the global supply of oil. In stark contrast to the 1970s, during the robust economic periods of the 1980s and 1990s gold significantly underperformed other asset classes such as stocks and real estate. After reaching a peak in 1980, the price of gold declined and flatlined for nearly 20 years.7 In fact, over two decades from 1980 to 1999, gold was one of the only assets to report real negative returns.8
Recent crises during the 2000s and beyond have renewed investor interest in gold as a safe haven. During the 2007 – 2008 financial crises and resulting Great Recession that lasted through mid-2009, the stock market suffered huge losses (with the S&P 500 falling over 35% in 2008 alone) while the price of gold increased.9 Investors began buying gold in 2008 as banks such as Lehman Brothers began to collapse. After the initial financial turmoil, as the Federal Reserve moved to lower interest rates and begin its first round of Quantitative Easing (QE), the price of gold skyrocketed to new record highs of over 1,000/oz.10 Again, during the 2020 COVID 19 pandemic, as the Federal Reserve was forced to cut interest rates and begin another round of QE, the price of gold surged to new record highs of near 2000/oz.11
Though gold is a valuable hedge, it can be volatile and yield negative returns during periods of strong economic growth. Following the Great Recession, the price of gold peaked at $1900/oz in 2011 and then lost almost half value over the next 5 years.12 In fact, gold did not surpass its 2011 market high until 2020. In other words, gold tends to thrive during economic downturns and periods of high inflation but may underperform other assets during strong bull markets and periods of economic expansion.
Gold as a Portfolio Diversifier
One of the primary roles of gold in the modern investment portfolio is as a diversifier. Gold has a beta of near zero, meaning that changes in the price of gold tend to move independently from the stock market. Gold’s near-zero beta is what makes it such a strong hedging instrument and what helps it outperform other assets during market downturns. Economic crises in 2008 and 2020 are two examples of bear markets where gold held its value while equities sold off.13 Gold also performs well during periods of geopolitical tension and large inflationary shocks.
Second, gold is a strong hedge against inflation. As the 1970s attest, gold's value tends to increase significantly during periods characterized by high inflation and negative real yields.14 The inflationary shock of the 2020s caused by the COVID 19 epidemic is another recent example where the price of gold skyrocketed as the Federal Reserve was forced to cut rates close to zero in response to deteriorating labor conditions.15 Gold is also used to hedge against the depreciation of fiat currencies. The value of gold and the U.S. dollar have historically had an inverse correlation meaning that when the dollar loses value, gold prices tend to go up.16 Gold is similarly used by foreign investors to hedge against depreciation of their own domestic currencies. Central banks across the world buy gold, for the very same reason, to diversify their foreign reserves.
Most financial analysts recommend owning gold as an investment. Studies indicate that owning even a small amount of gold in your portfolio can improve risk adjusted returns.17 It is commonly suggested to hold between 5% – 10% of your investment portfolio in gold18 but the percentage allocated to gold may vary depending on the investor's risk tolerance. Some market authorities suggest allocating significantly higher amounts of your investment portfolio to gold. For example, Harry Browne’s Permanent Portfolio Strategy suggests allocating 25% of your portfolio to gold to hedge against inflation.19 The proper amount allocated to gold in your investment portfolio, 5% – 25%, may best be determined by examining the current market cycle; closer to 25% during periods of high inflation and economic instability, closer to 5% during bull markets and periods of robust economic expansion.
Risk and Limitations of Investing in Gold
Although there are many benefits to investing in gold, investors should understand its limitations. Gold does not produce cash flows, interest, or pay dividends.20 Further, gold does not typically perform well during boom periods of economic expansion. During the bull market that ran from 1980 to 1999, the S&P 500 had extremely high annual returns while the price of gold declined from $850 an ounce in January 1980 to $250 per ounce by 1999.21 During periods of rapid economic expansion, investors in gold may miss out on gains achieved by owning stocks. Furthermore, investments in gold tend to lose value in high interest-rate environments. When interest rates are high, gold provides lower returns than investors can achieve by owning less risky investments like bonds. Gold will typically suffer low or negative returns during periods of economic expansion or periods in which the U.S. dollar appreciates.
Gold in Today’s Market
As of the mid-2020s, gold has started to regain its prominence. Several global forces, including the COVID 19 epidemic, inflationary pressures, wars, tariffs, and central bank policies, have created tension in the world economy. This economic tension has provided the perfect environment for the price of gold to appreciate. Gold’s most recent rise began with the COVID 19 pandemic as central banks were forced to provide market stimulus to stabilize the global economy. The flood of monetary easing that flowed into financial markets during 2020 – 2021 caused severe inflation across the world. The rates of inflation that followed were at levels that had not been seen for decades, leading many to begin losing trust in central banks and their monetary policies.22
More recently, the “debasement trade” has taken vogue as investors have sought to invest in real assets like gold fearing that massive government debt and money printing will cause fiat currencies to depreciate even further. A combination of low real yields and high global debt has caused investors to guard against the threat of currency debasement by investing in hard assets. In 2025, gold prices increased roughly 40% which is the biggest annual gain since 1979. And the price of gold is only expected to continue to increase going forward.23 Gold holdings in exchange-traded funds (ETFs) have increased to record levels as retail and institutional investors have poured in.24 Moreover, gold has benefitted from rising global tensions and conflicts in Ukraine, Venezuela, and Iran.
Another force that continues to elevate the price of gold is purchases by global central banks. In 2022 and 2023, purchases in the gold sector surged to multi-decade highs with 2023 purchases estimated at over 1,100 metric tons. These purchases have been dominated by the central banks of China, India, Turkey, and Russia25 who are buying gold to diversify their reserve holdings away from the U.S. dollar, hedge against inflation, and protect against geopolitical risks.26 According to The World Gold Council, the annual amount of gold purchased by central banks has more than doubled over the past few years.27 Financial authorities believe that the increase in demand from central bank buyers of gold is likely to persist into the upcoming years which further supports the bull investment case for gold.
Conclusion
Across history, gold has played a strategic role in investment portfolios. Gold’s investment appeal lies in its ability to hedge against major macroeconomic risks: surges in inflation, financial crises, currency devaluation, and geopolitical tensions. Although gold typically underperforms other growth assets during periods of stability or economic expansion, a moderate allocation of gold in your portfolio can diversify your investment holdings and preserve capital during market downturns. Gold’s long-standing reputation as a safe haven makes it especially powerful to hold in your portfolio when confidence in other investments is waning. The proper allocation of gold in your portfolio, between 5% – 25%, can improve risk-adjusted returns by offsetting losses during economic declines and periods of geopolitical instability.
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