Gold's Place in the All-Weather Portfolio

Gold is having a moment.

In a year when policy credibility is fraying and investors are questioning the foundations of fiat money, the world’s oldest asset has become one of the hottest macro trades.

Few assets provoke such extremes of opinion. Warren Buffett has never been a fan; Ray Dalio sees it as the ultimate store of value. For some, gold’s scarcity and permanence are its greatest strengths. For others, it’s a metal with no yield and no clear valuation anchor.

In its favour, gold has stood the test of time. Yet it has also swung through long cycles of boom, bust, and recovery.

• It soared during the great inflation of the 1970s.

• Then came two lost decades as inflation fell and central banks became heavy sellers.

• It rallied again in the 2000s but was range-bound for much of the 2010s.

Now, it’s booming once more. It is up over 50% this year and is compounding at 18% per annum since 2000. In an era of fiscal dominance and mounting concern over monetary debasement, the appeal is obvious.

But long-term allocators and students of history can’t ignore the other side of the cycle.

Between 1980 and 2000, spot gold prices fell 71% in nominal terms. With U.S. CPI averaging 4% per year over that period, the real drawdown was roughly –84%, or –8% per annum in real terms.

So much for gold’s inflation-hedging reputation during those decades.

Perhaps that’s why so few investors hold it in size. The most recent UBS Global Family Office Survey reports an average allocation of just 2% among large family offices to gold and precious metals, despite gold having outperformed the S&P 500 since 2000.

So how should investors think about an asset that can outperform equities in one macro regime yet endure twenty years of negative real returns in another?

For long-term allocators, and anyone building an all-weather portfolio, the challenge is twofold: understanding gold’s portfolio characteristics and interpreting them in the context of today’s macro environment.

In this piece I’ll look at:

1. The Case – the portfolio rationale for holding gold.

   
   

2. The Macro Context – its role in a portfolio and what history can teach us about sizing in the current regime.

   
   

3. The Call – how much exposure makes sense in an all-weather portfolio.

The Case: Uncorrelated returns

The most obvious reason to consider an allocation to gold is uncorrelated returns.

Despite the severe drawdown in the 1980s and 1990s, since 1975 spot gold has produced annualised returns of 6.2%[i]. Since 2000, returns have been even higher at 9.7% p.a. But critically, the correlation between gold and the S&P 500 has been 0.02, making gold a hugely attractive asset to hold from a portfolio diversification perspective.

Even if gold’s future returns fall short of the 6.2% delivered since 1975, the close to zero correlation to equities means that combining gold with equities will significantly enhance the risk adjusted return of the portfolio.

Since 2000, re-allocating 20% of an allocation from the S&P 500 TR to gold (for an 80-20 equity/gold portfolio) would have reduced the portfolio volatility from 15.2% to 12.8% and increased the realised annualised return from 8.0% to 8.8%.  Since 1975, the impact is not as strong but risk-adjusted returns would have been enhanced.

Intuitively, it adds to portfolio resilience. Gold and equities perform well in different environments. Equities are financial assets whose performance is driven by company earnings.  Equities tend to do well in periods of stable or solid growth and stable or falling inflation. Gold is a real asset that can do well in inflationary periods (like the 1970s) and in more challenging periods for equities. Both assets can do well in periods of excess liquidity and concerns over fiat money (as we have today). 

Looking at 5-year periods since 1975, we can see that gold performed well in the two 5-year periods when equities struggled (2000-2004 and 2005-2009). Equally in the periods when gold struggled, equities performed well (1980-1984 and 2010-2014), highlighting their different return profiles.

Gold’s relatively high volatility is another interesting aspect. Its annualised volatility since 1975 is 18% and although it has come down slightly it is still 16% since 2000.  High volatility is a doubled-edged sword. It means a reasonably sized allocation can meaningfully add or detract from the overall portfolio performance, unlike some low volatility assets like short duration bonds.

However, it is important to highlight that a close to zero correlation to equities over the long term does not mean gold is a hedge to equities over shorter term periods. In periods of stress mass liquidations have at times seen gold becoming more positively correlated with equities such as in October 2008, at the height of the Global Financial Crisis, when both equities and gold were down over -11%.

The Macro Context

What’s clear from the past analysis is that gold can be either very additive or detractive for the portfolio depending on the macro regimes. To understand why, we need to have a better sense on what have been the drivers of gold historically.

Asset or currency?

The debasement trade has been all the rage this year.  After repeated attacks on the Fed from the US administration and pressure to cut rates, markets are waking up to the risk that monetary policy may be directed at debt sustainability more than price stability going forward.

A less independent Fed may keep rates lower than otherwise, allowing inflation to drift higher, with obvious implication for the purchasing power of the dollar over time.  Gold has long been seen as an alternative to fiat money. It is a store of value and in the past has been a unit of account and medium of exchange (fulfilling the three standard functions of money). Critically its supply is more limited than fiat currency. For many it can be viewed as a hard currency, like the Swiss franc. And indeed of all the major currencies gold is most correlated to the CHF. 

From this perspective, confidence in central banking can be a critical driver of its value. The Burns’ Fed of the 1970s saw inflation spiral and gold rally, whereas the discipline and monetary tightening of Volcker saw credibility return to the Fed, continuing under Greenspan and coinciding with gold’s bleak two-decade drawdown. The onset of QE post GFC provided another fillip and the excess fiscal spending and monetary accommodation since 2020 has provided a perfect positive storm.

Linked to this, as a hard currency quoted against the USD its trajectory is also influenced by the general trend in the USD.  Sometimes the movement in the Dollar is intertwined with policy credibility concerns, as it was in the 1970s and at times in 2025. But more generally when the US dollar has been strong (such as in 2022), the long-trend uptrend in gold has corrected until USD strength has subsided.

Real yields

As an asset without any yield (and practically speaking a negative yield, once the cost of storage is factored in) it makes sense that the yields available on other assets may be an influence on gold.

The performance of gold has, up until recently, been broadly in line with that. Gold’s rise in the 2000-2011 period coincided with a trend decline in US real yields. Gold corrected and was in a range as real yields then rose until 2018.  Another lurch lower in yields up until early 2020 saw the gold rally resume, while rising yields saw gold correct in 2022.

But since mid-2024, gold has been more heavily influenced by other drivers. Real yields have stabilised and come off their highs but, at about 2%, US 10-year real yields remain attractive relative to levels seen in the last two decades. However, gold has taken off, more than doubling since the start of 2024, and rising in periods both when real yields are rising and falling.

Central bank purchases (to some extent driven by fears of the weaponisation of the US dollar), concerns over debasement, USD weakness and a shifting investor sentiment have all been more important than real yields.

Inflation, debasement and market psychology

The simplest reason for considering gold that is often put forward is as an inflation hedge.  As gold is a real asset, that can be used commercially as well as a store of value, it makes sense that its value should move in line with inflation.  And over very long periods gold has retained its purchasing power.

But the term “inflation hedge” can be misleading.  A hedge evokes the idea that if the asset being hedged goes up, the hedge goes down and vice versa. Gold’s relationship with inflation is not that tight.  For one, gold is much more volatile than inflation and second as we have seen, gold had a two-decade decline between 1980 and 2000 while US inflation averaged 4.0% per annum.

A better way to think about is that over the very long-term gold is likely to preserve its value in real terms but over shorter periods, returns may vary depending on whether inflation and/or debasement concerns are dominant market themes and drivers. 

In the 1970s, persistently high inflation became embedded in investor psychology and gold benefited as investors searched for assets that could protect their portfolios. But as Volcker won the war over inflation, and globalisation added a disinflationary force, investor demand moved to financial assets like bonds and equities which benefited more directly from the disinflationary trend.

A recent article from Robert Armstrong in the FT suggested that the debasement trade didn’t make sense. Yes, he argued, it seemed plausible that gold might benefit from debasement concerns but why were we not seeing the same reaction in the Dollar and US Treasuries?

The reality is that markets are nonlinear, adaptive systems which defy such neat explanations.  Market psychology plays a huge part. If gold becomes the chosen expression of inflation or debasement anxiety, the response can be reflexive and self-reinforcing. There’s nothing like price to shape sentiment: investors are buying gold because it’s going up, while inflation and debasement concerns supply the story after the fact.

But another conundrum for investors at the current juncture is that although the macro narrative is favourable, the rally has taken the real gold price to elevated levels. And historically, periods of very strong returns have sometimes, but not always been followed by more subdued performance.

The Allocation

Bringing these factors together there are a number of points to consider when allocating to gold:

·       There is a compelling case that gold will retain its purchasing power in the face of inflation over the long term

·       Realised returns over the last 25 and 50 years have been much higher than just inflation but, against that, after a strong move up its real price is now considerably higher

·       There is some evidence of lower forward returns after periods of strong returns, but it is a weak relationship

·       Gold’s low correlation to equities makes it very attractive from a portfolio perspective particularly for an all-weather investor

·       However, low correlation doesn’t mean it is a hedge to equities or guaranteed to deliver “crisis alpha”

·       Gold has delivered attractive returns but that has to be balanced by the huge real drawdowns we have seen in the past

·       Gold’s high volatility is a plus and minus in that it can have a meaningful impact on portfolio performance when doing well but can also meaningfully detract

·       The current macro backdrop of fiscal dominance, debasement concerns ongoing liquidity provision and concerns about the US dollar is a favourable backdrop

·       With a more dovish Fed Chair expected and debt sustainability concerns likely to remain a theme over multiple years the risks seem skewed to the upside.

·       But any upside surprise to US growth, less monetary easing or a surprise need to tighten policy in the US next year could radically change the outlook particularly given the overextended nature of the move

From an allocation perspective it makes sense to approach gold from two angles: 

1.      Maintaining a core allocation as a portfolio diversifier - the zero correlation to equities and return profile make it a natural addition to an all-weather portfolio even with the risk of prolonged drawdowns.

2.      Having a mechanism to get tactical exposure that varies depending on the market theme and narrative can make a lot of sense for an asset that has had such prolonged boom bust cycles.  Systematic trend following strategies provide that systematic tactical allocation and an allocation to trend would naturally increase the overall gold exposure in times when it is trending higher and reduce the exposure when it is correcting.

Of course, if one ran a gold/equity/bond optimiser based on the last 25 years it would give a high allocation to gold but that ignores the 1980-2000 drawdown. Ultimately it is a value call. For me a core allocation of 10-15% with the ability of tactical systematic strategies to take that to 25% makes sense and balances the opportunity and the risks.

Conclusion

The current macro backdrop of fiscal dominance, debasement concerns, ongoing liquidity provision and a softer USD makes gold’s setup attractive. Yet history reminds us that strong narratives can lead to overextended moves. Position sizing, balancing strategic conviction with tactical flexibility, matters more than ever.

Gold’s value to an all-weather portfolio isn’t just about its potential for return — it’s about the pattern of those returns. It is one of the few assets whose drivers sit outside the growth–inflation nexus that governs most markets. Its independence — from policy, from earnings, from credit — is what gives it meaning. In an age of fiscal dominance and fading trust in institutions, that quality is scarce.

But all-weather investors must keep the downside in mind as well. Gold’s shift from top-performing to worst-performing asset between the 1970s and 1980s is a cautionary tale. The key is to hold enough to make a difference, but not so much that it dominates — pairing a strategic core allocation with a tactical overlay is the best way to balance opportunity and risk.

[i] Gold was fixed against the dollar during the Bretton woods regime and was not investable for US investors between 1934 and 1974 after Roosevelt Executive order of 1934 required US residents to surrender gold. The prohibition on owning gold was ended in December 1974 by Nixon.

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