Gold: Bugs, Bears and Myths

Introduction

Gold prices today are near record highs - even in real terms - implying that forward real returns may be modest by historical standards (Figure 1). Yet gold's most compelling attribute remains its historically proven ability to enhance portfolio diversification over the long term. It is widely perceived as a safe-haven asset: during periods of market stress or crisis, investors often flock to gold for its stability and lack of credit risk. Central banks hold gold in their foreign exchange reserves precisely for these benefits and as a hedge against economic and geopolitical risks. These attributes can justify gold’s inclusion in an institutional portfolio, helping to reduce drawdowns and provide ballast, without materially sacrificing long-run performance.

In this paper, we consider gold from the perspective of an institutional investor wishing to allocate to the yellow metal within a traditional 60/40 portfolio (or variant thereof). We examine gold's diversification properties and assess its impact on portfolio risk and return characteristics.

Figure 1. Evolution of the inflation-adjusted gold price over time

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Source: Bloomberg, Man Group. Data from December 1974 to July 2025. Past performance is not indicative of future results.

Quantifying diversification

Gold and equities

Perhaps surprisingly, gold’s annual volatility is roughly on par with that of the S&P 500. In a portfolio context, however, gold’s correlation with equities is near zero. Further, gold’s correlation to stocks has remained consistently low through time, with no evidence of sustained spikes during equity market drawdowns. This reliable lack of correlation (and occasional inverse correlation) in times of stress underscores gold’s role as a diversifier for equities – and as a potential risk mitigator for equity investors.

Gold and fixed income

Gold’s correlation with fixed income returns is also low on average, but the relationship is more nuanced than with equities. In general, gold shows nearly zero correlation with short-term government bonds, and a low-to-moderate correlation with longer-duration bonds. However, the gold–bond correlation has not been as stable over time and has varied across different interest rate and inflation regimes.

Figure 2 plots real gold prices versus real bond yields, demonstrating that the correlation between gold and bonds can shift from negative to positive depending on the macro environment. In periods of rising inflation and negative real interest rates, gold is often negatively correlated to bonds. This typically occurs because such periods hurt bond returns while boosting gold.

On the other hand, during deflationary regimes, gold can exhibit a mildly positive correlation with bonds. In such environments, both gold and high-quality bonds may serve as safe havens as their prices rise together.

Figure 2. Variability in the relationship between real gold price and fixed income real yields (January 1997 to July 2025)

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Source: Bloomberg, Man Group.

Overall, gold’s correlation with fixed income is low over the full cycle, but it is best characterised as regime-dependent: negative in stagflationary or inflationary scenarios, and slightly positive in deflationary, “risk-off” scenarios. Importantly, gold’s low average correlation with both stocks and bonds means it can play a valuable diversifying role in a multi-asset portfolio – especially when traditional asset relationships break down.

Gold’s correlation with a 60/40 portfolio

Most investor portfolios contain both equities and fixed income – 60/40 or some variation on that theme. Figure 3 compares the performance of gold and the 60/40 portfolio across periods of positive and negative stock-bond correlation. When stocks and bonds are negatively correlated, a 60/40 portfolio is already somewhat hedged, and gold’s additional diversification benefit, while still present, is less dramatic. But when stocks and bonds become positively correlated – as tends to happen in inflationary scenarios – the 60/40 portfolio can suffer concurrent losses, and this is when gold comes into its own. Indeed, gold has historically been one of the few assets that performs well when both equities and bonds are struggling.

A vivid example is 2022, which saw surging inflation and rapidly rising interest rates, causing an unusual tandem selloff in both US stocks and bonds (leading the 60/40 portfolio to have its worst year in history). Gold, meanwhile, was approximately flat in 2022 (in US dollar terms).

Over longer time spans, incorporating gold has improved the risk-adjusted performance of a 60/40 portfolio. Adding a third, uncorrelated return stream reduces the portfolio’s volatility and mitigates extreme drawdowns, often without materially reducing total returns. In fact, historically the average return of portfolios with a modest gold allocation has been on par with (or sometimes higher than) a 60/40 portfolio, because gold has delivered competitive returns in certain periods (often during high inflation) that offset its lower returns in disinflationary times.

Figure 3. Stock-bond correlation and gold

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*Annualised returns over period

Source: Bloomberg, GFD, Man Group. Gold is represented by Gold USD spot price. 60/40 portfolio is 60% S&P 500 and 40% Bloomberg US Treasury Long Index (assumed monthly rebalancing).

Interestingly, gold’s correlation to the 60/40 portfolio has, on average, been opposite in sign to that of the stock-bond correlation, as shown in Figure 4, clearly demonstrating gold’s ability to provide diversification benefits.

Figure 4. Stock-bond correlation versus gold correlation to 60/40 over time

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Source: Bloomberg, Man Group. Gold is represented by the Gold USD spot price. 60/40 portfolio is 60% S&P 500 and 40% Bloomberg US Treasury Long Index. Correlations are calculated over rolling 10-year periods.

Candidate safer assets

Other assets that investors turn to for diversification or safety include Treasuries, alternatives, TIPS (Treasury inflation-protected securities), defensive currencies and infrastructure. However, gold stands out among these assets because it uniquely combines several desirable traits: it is a real asset with intrinsic value that responds to inflation (like commodities and TIPS); it has a track record of holding or increasing value in severe financial crises (like high-quality bonds or reserve currencies); and it carries no credit or default risk.

Further, gold serves as a form of insurance that tends to pay off during tail risk events that hurt traditional assets, while also offering upside in certain macro conditions. Notably, gold not only appears to possess a much lower correlation to a 60/40 portfolio compared to other candidate “tail-hedging assets” but also tends to be negatively correlated and has a negative beta during downside scenarios (i.e., periods when the 60/40 portfolio experiences negative returns). As shown in Figure 5, commodities are the only other tail-hedging asset to exhibit this trait.

Figure 5. Candidate tail-hedging assets

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Source: Bloomberg, GFD, Man Group. Data from August 2010 to July 2025.

Performance in bear and bull markets

Gold in bear markets

Gold has often provided meaningful downside mitigation during deep stock market downturns, as shown in Figure 6. During the 2000–2002 Dot-Com collapse, gold proved its worth: while the S&P 500 fell by nearly 50% over that drawn-out crash, gold steadily appreciated. The pattern repeated in the 2007–2009 Global Financial Crisis (GFC).

Even in more recent turbulence, gold’s safe-haven characteristics have been evident. An investor holding gold through the first quarter of 2020 (COVID crisis) would have seen it serve as a source of liquidity and then bounce back strongly, helping to offset equity losses.

Figure 6. Gold in drawdowns

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Source: Bloomberg, GFD, Man Group. Performance shown in USD terms. Past performance is not indicative of future results.

Gold in bull markets

The flip side is that gold often underperforms during roaring bull markets for equities, as demand for a crisis hedge wanes. During these periods, the opportunity cost of holding gold is higher, and capital tends to flow toward riskier assets. A case in point is the post-2011 period: after hitting a peak around 2011, gold entered a multi-year bear market while equities enjoyed a prolonged bull run.

This is not surprising – gold is an insurance asset, and insurance tends to incur a cost during good times. The overall effect is that a portfolio including gold typically underperforms a 60/40 portfolio in the best of times but outperforms (by losing less or gaining more) in the worst of times. Many institutional allocators find this asymmetry attractive, as it can smooth returns and reduce the probability of large capital losses.

Figure 7. Gold versus S&P 500 – annualised returns in equity bull markets

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Source: Bloomberg, GFD, Man Group. Performance shown in USD terms. Past performance is not indicative of future results.

Portfolio analysis within defensive allocations

Let us turn now to evaluate gold from a top-down asset allocation perspective: how does introducing gold into the defensive allocation influence the overall portfolio?

Imagine a portfolio for a global investor that is 60% equities (the growth bucket) and 40% defensive assets (the safe bucket). Historically, a portfolio that included gold in its safe bucket would have exhibited lower volatility and shallower drawdowns than a 60/40 with bonds alone. During periods of strong equity rallies and low inflation, the gold-inclusive portfolio might lag slightly. But over a full cycle, the risk-adjusted returns of the portfolio with a gold allocation tend to be higher. Essentially, gold improves the efficiency of the portfolio – delivering similar returns for less risk, or sometimes even a moderate return boost due to its strong performance in certain environments (Figure 8).

We have constructed our hypothetical portfolios by starting with a portfolio with a 60% allocation to global equities, 30% to fixed income and 10% to alternative assets¹ (Portfolio One). We then add gold to this portfolio (5% in Portfolio Two, 10% in Portfolio Three and 15% in Portfolio Four), funding the allocation through the (roughly proportionate) sale of global equities and fixed income.

The results over the entire backtest period from 1993 to 2025 highlight how the addition of gold can significantly improve risk-adjusted performance. The maximum drawdown for the portfolios with gold is meaningfully lower than that of the portfolio without gold (41% drawdown for Portfolio One, versus 35% for Portfolio Four).

Importantly, this was achieved without sacrificing long-term performance, with the cumulative return over the period actually increasing as we increased exposure to gold within the portfolio.

Figure 8. Impact of gold on defensive allocations²

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Source: Bloomberg, GFD, Man Group. Assumed monthly rebalancing. Performance shown in USD terms. Hypothetical portfolios are for illustrative purposes only and do not represent actual investment results.

Partitioning our backtest window, however, reveals a tale of two periods. Prior to 2000, gold experienced a prolonged period of poor performance. Despite gold’s poor performance during this period from a pure return perspective, the portfolios with exposure to gold were less volatile than those without gold. However, this lower volatility came at a cost: the risk-adjusted returns (return per unit of risk) were slightly lower. On the positive side, portfolios with gold exposure also experienced smaller maximum drawdowns.

It’s worth noting that the ideal allocation to gold can depend on an investor’s objectives and risk tolerance. However, there is a strong case that diversifying part of the defensive allocation into gold improves portfolio robustness.

The downsides of holding gold

Valuation and the “golden constant”

One concern with gold is its current price level. The yellow metal has effectively preserved purchasing power over very long periods (the “golden constant” (Jastram 1977)). This suggests that the long-run real return of gold is zero: it neither appreciates nor depreciates in purchasing power over extremely long horizons. If that is true, then periods when gold delivers substantial positive real returns (outpacing inflation) will eventually be followed by periods of mean reversion where gold underperforms inflation to revert to the mean purchasing power.

If the “golden constant” holds, gold’s real value may eventually level out or revert. We illustrate this by plotting 10-year real (inflation-adjusted) gold returns against real gold prices (i.e., starting valuations) in Figure 9. The chart shows quite a significant negative relationship between real returns and real gold prices.

Figure 9. The real value of gold and subsequent returns (January 1975 – July 2025)

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Source: Bloomberg, US Bureau of Labor Statistics, Man Group. The 10-year forward real gold return (y-axis) is the annualised inflation-adjusted return over the subsequent 10 years. Past performance is not indicative of future results.

Volatility and inflation hedge reliability

Gold's high volatility and imperfect correlation with inflation over short-to medium-term periods present additional risks. It tends to shine when inflation is high and out of control, or when real yields collapse, rather than hedging small, predictable upticks in inflation. In addition, there is an opportunity cost to holding gold, especially in a rising rates environment (when yields on bonds and cash are high).

Gold’s volatility can introduce notable mark-to-market fluctuations in a portfolio. While these movements are uncorrelated with equities or bonds, a 10% allocation to gold, for instance, could add or subtract 1.5% to overall portfolio returns in a year just from gold’s volatility (10% * 15% = 1.5%). Crucially, investors must maintain the gold allocation through time to capture its benefits during downturns.

The upsides of holding gold

Central bank demand and reserve asset status

One of gold’s strongest tailwinds is the sustained demand from central banks around the world. Gold is not controlled by any government, and this neutrality and lack of credit risk make it a favoured reserve asset alongside currencies like the US dollar. In recent years, central banks have been net buyers of gold at a historic pace as geopolitical tensions have intensified.

This buying has been led by emerging market central banks such as China, India, Turkey and Russia. Many emerging economies hold a relatively low percentage of their reserves in gold compared to developed countries, suggesting substantial room for further accumulation. If these central banks deliberately raise the gold percentage of reserves, the impact on demand could be significant. This trend reinforces gold’s enduring role as a critical store of value in the international monetary system.

Institutional and investor adoption

The strategic value of an allocation to gold is gaining broader recognition among institutional investors. The rise of highly liquid gold-backed financial products provided the initial impetus for this, while the recent growth in gold exposure in portfolios can likely be attributed to an increasing desire among institutional investors for assets that provide greater diversification and moderate inflation protection. A modest 1-2% shift into gold by even a small fraction of global institutional assets could generate substantial demand relative to the gold market's size.

Potential regulatory changes

Another potential upside factor explored by Harvey (2025b) is regulatory changes that could formally elevate gold’s status in the banking system. Under current Basel III banking regulations, gold is not classified as a High-Quality Liquid Asset (HQLA) for meeting liquidity coverage ratios. If regulators were to reconsider this and designate gold as HQLA (even at a haircut), it would effectively encourage commercial banks to hold more gold on their balance sheets for liquidity purposes. Harvey (2025b) shows that a 3% allocation to gold for banks’ HQLAs would provide a demand shock similar to that of the introduction of gold ETFs.

Macro and geopolitical tailwinds (de-dollarisation)

Geopolitically, the US dollar's status as the world's dominant reserve currency faces mounting challenges. Tensions between major powers make reliance on a single country’s currency politically sensitive, and the events of 2022 when Russia’s dollar reserves were frozen underscore the geopolitical leverage embedded in reserve assets. In contrast, gold is seen as a neutral asset. It is not issued by any government, so is challenging to weaponise or sanction.

Constrained supply

Finally, it’s worth mentioning that gold’s supply dynamics naturally support its value over time. Gold mining is a slow and increasingly difficult process, and the annual production of gold adds only around 1.5% to the global above-ground stock. In contrast, the supply of fiat money, or even government bonds, can expand rapidly if authorities choose.

Conclusion

While gold’s recent performance has been remarkable, the case for including gold in a portfolio rests on its enduring strategic benefits rather than momentum. Gold serves a valuable role in global portfolios as a diversifier and risk mitigator, especially for institutional investors concerned with preserving capital and reducing volatility.

The empirical evidence is compelling. Even relatively modest allocations to gold have historically improved portfolio outcomes. Its low correlation to traditional assets – steady during market extremes – means gold has reliably added diversification across multiple decades and economic regimes.

In today’s environment of economic uncertainty, evolving inflation dynamics, and geopolitical shifts, gold can play an important role in boosting the resilience of portfolios.

1. In this case, real estate and commodities.
2. Hypothetical performance results have inherent limitations and do not represent actual trading results.

This material is for informational purposes only and does not constitute investment advice and should not be relied upon as the basis for any investment decision. The analysis presented herein is based on historical data and backtested results. Historical performance does not guarantee future results, and actual performance may differ materially from that shown. All investments involve risk, including the potential loss of principal. Investors should consult with their financial advisors before making any investment decisions.