SUMMARY
Adding gold-linked investments to an asset allocation has helped mitigate risk over time. But they come with many pitfalls of their own.
KEY TAKEAWAYS:
Investments linked to the spot price of gold have delivered decent returns over time
They have often helped diversify against equity falls, dollar weakness and inflation
Investments linked to the spot price of silver and gold miners may also have uses in a portfolio
Risks include rising real interest rates and a strengthening U.S. dollar
Gold has a special significance when it comes to anniversaries.
Enduring marriages, a lengthy professional career and venerable monarchical reigns are often marked with gold, be it of the actual or metaphorical variety.
Less widely celebrated are anniversaries relating to the precious metal itself.
December 2025, for example, will be a decade since the last multi-year low in the spot price of gold, and potentially, therefore, the ten-year anniversary of its bull market, assuming it remains in force by then.
Admittedly, this will be hardly worthy of a ceremony or commemorative trinket. Nevertheless, for those who invest in related assets, such as exchange-traded funds or mutual funds linked to the underlying spot price, it may be worth reflecting on gold’s recent and longer-term performance.
(ETFs or mutual fund exposure is our focus in this article. How you might consider seeking to gain exposure should be part of your discussion with your financial professional.)
So, what might investments linked to the spot price of gold and related assets have done for portfolios over the last decade and more? And what are some of the risks involved?
Gold’s performance vs. other asset classes
Since December 2015, the spot price of gold has risen by an annualized 10.4%. This is not far behind Developed Equity – shares from advanced economies including the U.S. and Europe – and ahead of Investment Grade, High-Yield and Emerging Market Fixed Income.
(These returns are quoted before fees and expenses, which would have lowered returns.)
Starting from when gold began trading freely in 1971, its record versus other asset classes is also respectable – figure 1.
Its 8.1% annualized return is similar to our estimate of asset class returns for High-Yield Fixed Income (8.2%) and Emerging Market Fixed Income (8.5%).
Unlike those asset classes, though, gold’s return was not assisted by coupons or reinvested coupon income.
Investments linked to gold’s spot price offer no income stream whatsoever and indeed incur holding costs such as those relating to administration, investment management and trading, insurance and storage.
As a result, investments linked to spot gold such as exchange-traded products and mutual funds depend on price appreciation alone.
So, while past performance is never a guarantee of future returns, gold’s historic record might have made related investments a worthwhile addition to a portfolio.
| Annualized return since 1971 (%) | Volatility since 1971 | |
|---|---|---|
| Developed Market Equity | 11.16% | 14.86% |
| Emerging Market Equity | 10.94% | 19.52% |
| Investment Grade Fixed Income | 6.67% | 4.74% |
| High Yield Fixed Income | 8.29% | 8.72% |
| Emerging Market Fixed Income | 8.54% | 9.15% |
| Cash | 4.56% | 0.99% |
| Hedge Funds | 11.16% | 7.77% |
| Private Equity | 14.44% | 18.91% |
| Real Estate | 9.26% | 16.96% |
| Commodities | 4.65% | 22.23% |
| Gold | 8.10% | 19.10% |
| Silver | 5.58% | 32.64% |
Source: Bloomberg and Citi Wealth Strategic Asset Allocation and Quantitative Research Team, as of Jan 2025. Volatility is expressed by standard deviation, a measure of how much returns have fluctuated around their past averages. See Glossary and Asset Class Definitions. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary. Diversification does not ensure profit or protection against loss.
Volatility and big drops
Inevitably, there’s a flipside to the spot gold price’s polished long-term performance.
While it has delivered similar returns to High-Yield Fixed Income and Emerging Market Fixed Income, the volatility of its returns has been higher.
The standard deviation of its 12-month returns since 1971 comes in at more than double: 19.1% versus 8.7% and 9.1% – figure 1.
Along the way, it has suffered some painful peak-to-trough declines.
After hitting a then-record high in 1980, the spot price of gold went on to shed 70% over the next nineteen years or so.
Having fallen to low or even negative levels in the 1970s, real interest rates shot up and then remained high for much of the 1980s and 1990s.
Then, as real rates came down substantially from 2000, the spot gold price recovered.
After several years of gains, it then shed 27.8% in seven months during the depths of the Global Financial Crisis in 2008 as investors scrambled for liquidity, even though it went on to make fresh all-time highs the following year.
What have gold-related investments done for portfolios?
Investors often seek exposure to gold because of its reputation for helping to diversify portfolios and providing a harbor against inflation.
The experience of the last 10 years and more would seem to justify this.
The correlation of gold’s spot price to other asset classes since 1971 is shown in figure 2.
It has been negatively correlated to most other asset classes and only somewhat correlated to the rest.
| Correlation to gold’s spot price | |
|---|---|
| Developed Market Equity | -0.08 |
| Emerging Market Equity | 0.18 |
| Investment Grade Fixed Income | -0.12 |
| High Yield Fixed Income | -0.09 |
| Emerging Market Fixed Income | 0.25 |
| Cash | 0.14 |
| Hedge Funds | -0.03 |
| Private Equity | -0.10 |
| Real Estate | -0.02 |
| Commodities | 0.41 |
| Gold | 1.00 |
| Silver | 0.79 |
Source: Bloomberg, as of Jan 2025. Correlation here measures how much returns of two asset classes move in tandem with one another over time. A correlation of -1 indicates perfect negative correlation, i.e., where two assets move in the opposite direction, albeit not necessarily to the same extent. A correlation of +1 indicates perfect correlation, where the two assets move in tandem, and a correlation of 0 indicates no relationship.
See Glossary and Asset Class Definitions below. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary. Diversification does not ensure profit or protection against loss.
This includes alternative asset classes often included in portfolios for their additional diversification potential: hedge funds, private equity and real estate.
During outbreaks of market stress – typically triggered by economic and geopolitical concerns – gold investments have frequently shone as a portfolio diversifier.
Figure 3 shows spot gold’s performance compared to U.S. equities and U.S. Treasuries during ten such episodes going back to the 1987 stock market crash.
While equities usually experienced heavy losses, gold rose on seven occasions and saw only minor losses on others.
Figure 3. Performance of gold, US equities and US bonds during historical periods of market stress
Source: Citi Wealth Investment Lab, Bloomberg. Data from August 1987 – December 2022. Scenario dates and indices shown are listed in the Glossary. Indices are unmanaged. An investor cannot invest directly in an index. They are shown for illustrative purposes only and do not represent the performance of any specific investment. Index returns do not include any expenses, fees or sales charges, which would lower performance. Past performance is no guarantee of future results. Real results may vary. Diversification does not ensure profit or protection against loss.
Importantly, these relationships aren’t static, though. At times, gold’s spot price has proven somewhat correlated to the likes of equities and other asset classes.
And we can’t be sure that the future will necessarily resemble the past.
In recent years, for example, investments linked to the metal have risen amid a strengthening U.S. dollar and rising real interest rates, in defiance of typical relationships.
What about silver-related investments instead?
Traditionally awarded to the runner-up in sporting contests, silver has outpaced gold during the yellow metal’s two previous major bull markets. (It has so far lagged during the present one.)
Many investors therefore wonder if silver ETFs or the like might do the same job as gold-linked ones in a portfolio, therefore, but with more upside potential.
While the semi-precious metal’s spot price often risen faster than that of gold during the latter’s uptrends, its returns over time are clearly a runner-up’s performance.
Since gold became freely tradeable in 1971, silver has returned 5.6% annualized before fees and charges, compared to gold’s 8.1%.
What’s more, silver has proven much the riskier of the two. The annualized volatility of its spot price has been 32.6% versus 19.1% for gold.
And despite those bigger rallies during gold’s bull markets, silver has also tended to drop even harder in the subsequent bear phases.
But the stronger argument against using silver investments instead lies in its correlations with other asset classes.
In most cases, silver has been more correlated to the main asset classes than gold. That has made related investments a less effective portfolio diversifier.
One reason for this is that silver is much more widely used than gold in industrial processes, which tend to rise and fall with economic activity.
Gold, by contrast, is influenced more by such forces as central bank demand, whose revival in recent years has helped spur price gains.
The proportion of central bank reserves held in gold has risen from 9.4% to 18.3% in the decade from the third quarter of 2014.1
Admittedly, its correlations have still been weakly positive. Also, silver’s correlation with gold has been less than perfect, at 0.79.
So, there may be a case for combining some silver ETFs with gold equivalents.
Could gold miners replace gold exposure in a portfolio?
In many investors’ eyes, one of the main drawbacks to gold is its lack of income. To them, gold mining equities may seem to offer the best of both worlds, therefore.
First, gold mining – at the sector level – has tended to move somewhat with gold itself, with a long-term correlation of around 0.7. The sector might be thus considered a passable substitute.
Second, gold miners have the potential to pay dividends, which the likes of spot gold-linked exchange-traded funds and mutual funds do not.
During a protracted gold bear market – particularly such as that of 1980–1999 – such a feature may help mitigate losses.
Despite these potential advantages, though, there is a significant drawback to this approach.
As a variety of company, gold miners trade more like equities, making them less useful for diversifying equity risk, and the evidence does indeed suggest that gold miners are more correlated with equities.
Since 1995, for example, the FTSE Gold Mines Index has had a low but nonetheless positive correlation of 0.3 with developed equities; spot gold’s correlation with developed equities was zero.
Golden anniversaries
At anniversary celebrations, it is customary to recall the good times.
After all, dwelling upon episodes of marital disharmony or workplace spats would be indelicate, especially in front of guests.
As we prepare to mark ten years since gold’s last major low, however, it is important to remain even-handed.
Over the last decade and more, gold investments would have glistered within diversified portfolios.
But at other points during the period, its effects were rather less lustrous, notably during periods of very high U.S. interest rates.
So, for those willing to stay the course – in sickness and in health – portfolio exposure to the yellow metal via the likes of stock market listed investments may be worth considering.
