Few asset classes engender as much debate as gold. The discussion surrounding gold is most prevalent in times of heightened market volatility and uncertainty. Aldrich Wealth’s investment team aims to provide an objective view of the role gold might play in an investment portfolio – confirming or debunking the supposed merits of investing in gold.

We evaluate gold as a:

• Portfolio Diversifier: Does gold provide meaningful diversification benefits?
• Hedge Against Inflation: How effective has gold been in inflationary and deflationary environments?
• Return Driver: Do the returns of gold stack up against other asset classes?

In this analysis, our findings are mixed. The diversification benefits of gold have been modest at best, and the ability of gold to hedge against inflation is also questionable. Further dampening the argument for including gold in an investment portfolio, its historical performance relative to other asset classes has been lackluster.

Arguably the greatest advantage to an investment in gold is diversification, as the foundation of any investment portfolio are stocks and bonds. Typically, investors with a longer time horizon and a more aggressive risk tolerance will allocate more of their portfolios to stocks than bonds. Traditionally, a balanced portfolio is made up of 60% equities and 40% fixed income. In the US, the S&P 500 acts as the benchmark that large cap stocks are measured against. Similarly, the Bloomberg Barclays US Aggregate Index acts as the benchmark that bonds are measured against. On the periphery, an investor may allocate to asset classes other than stocks and bonds, such as commodities, of which gold is a subset.

Between March 31, 2010, and March 31, 2025, the S&P 500 and S&P GSCI Gold Index exhibited a correlation of around 0. Recall that correlations range from 1.0 (positive correlation) to -1.0 (negative correlation). A correlation of zero indicates that there is no relationship between the two variables. Therefore, gold has not exhibited strong diversification benefits relative to stocks.

Although gold proponents often claim that the asset acts as a safe haven when stocks fall, data shows that bonds consistently offer better diversification in down markets. In 2019, investment consulting firm Fiducient studied monthly periods in which the S&P 500 fell 1% or more.

According to their findings, bonds exhibited a negative correlation with stocks in all down periods for the S&P 500. Gold, on the other hand, did not. For example, in the five months when the S&P 500 declined 10%, gold showed a 0.25 correlation with stocks, whereas bonds showed a -0.33 correlation with stocks. In short, historically when the stock market enters a correction of 10% or more, bonds will commonly act as a ballast of a portfolio.

Although gold offers legitimate diversification benefits, investors looking for downside protection from stocks have historically been better served using bonds.

Gold bugs often argue that gold acts as a hedge against inflation. As inflation concerns catch headlines, investors might be tempted to heed the calls of gold bugs and turn to the shiny metal to maintain their purchasing power.

Unfortunately, historic data shows the common perception that gold hedges inflation is not entirely accurate. Over the 45 years, between June 1976 and May 2021, the monthly change in the consumer price index (CPI) and the monthly change in the price of gold exhibited a correlation of just 0.16. This data suggests a positive but immaterial relationship exists between inflation and gold.

Interestingly, studies show that gold performs best in times of deflation. Looking at the rate of inflation and the return of gold between January 1976 and June 2019, gold delivered an average monthly return of 0.96% during periods of high inflation (“defined as more than 4.0% year-over-year.”) During periods of deflation, however, gold delivered an average monthly return of 1.78%.

Finally, historical returns of gold have left something to be desired. Between March 31, 2010, and March 31, 2025, gold delivered an annualized return of 6.7%, while the S&P 500 delivered 12.9%. Admittedly, past returns are not indicative of future results, and there have been decades in which gold has bested both bonds and stocks. For example, between January 2000 and December 2010, gold returned 6.7% while bonds added 6.5%, and the S&P 500 dropped -0.2%.

Still, runs of outperformance by gold like the one seen in the first decade of the new millennium speak more to the pricing inefficiencies that exist for the asset class. While cash flows largely determine the returns of stocks and bonds, the returns of gold are theoretically determined by supply and demand. Given that the supply of gold is relatively stable, demand is arguably an essential factor in determining the price of gold.

Frequently, demand is driven by factors that cannot be forecast by investment analysts. Ultimately, the unpredictability surrounding the pricing of this asset class, coupled with decades of inferior returns, makes it difficult to recommend investors allocate to gold in place of traditional stocks and bonds.

The summary of our findings suggests that it generally behooves investors to avoid allocating to gold. While the asset class does offer some diversification benefits to stocks, bonds help provide better downside protection with a yield component attached. Over longer time periods gold has delivered middling returns primarily driven by unpredictable factors. Despite claims to the contrary, gold has not acted as a hedge against inflation. Instead, gold performs best in times of deflation. Gold has provided periods of attractive returns, but as a core holding the long-term benefits are not compelling.

Disclosure: This information presented is for educational purposes only and is not intended to make an offer or solicitation for the sale or purchase of any securities or commodities. Past performance is not an indication of future performance. All investments involve risk and unless otherwise stated, are not guaranteed. Benchmarks and indices are shown for illustrative and comparison purposes only. Indices and benchmarks are unmanaged and are not available for direct investment and do not include any transaction, management or other fees or costs.