Dazzled by gold’s recent sparkle? Don’t be.
Here’s why gold doesn’t merit being a core portfolio holding.
Article published: March 06, 2025
The price of gold is on a tear.
Since the start of 2024, it’s rallied more than 30%, sending it to multiple highs and beating the S&P 500’s return. Gold bugs the world over may be collectively chanting “we told you so!” And who can blame them after enduring years of watching rallies in their glittery commodity fade away.
With gold’s rally more than a year old and still going strong, we still believe that a retirement portfolio’s gold exposure should be no more than a few percentage points. In fact, our view is as firm as ever and here’s why.
We’ve seen this movie before
Unlike stocks or bonds, gold can’t generate income through dividends, earn compound interest or create value through long-term earnings growth. It can’t spin off steady retirement income on its own. Gold’s supply is finite, so its value depends on the vagaries of its global supply and demand.
Today’s rally is due partly to gold purchases by central banks. The circumstances around the purchases may appear to make this rally different, but ultimately, gold’s price remains subject to the same fluctuating supply and demand dynamic that’s driven it historically.
Here’s what happened: The G7 nations froze a large amount of assets owned by Russia’s central bank in response to the Ukraine war. In a defensive move, a number of central banks began to diversify their holdings and buy more gold because it’s an asset that can’t be frozen the way other assets can. Trying to time how long periods of increased gold demand like this will last can be a risky gamble, like any market timing.
What about gold being an inflation hedge?
Things that are in fixed supply like gold can be perceived as providing security against depreciation. That’s why gold is seen as an inflation hedge. Then again, this could be true for a range of commodities, and could even pertain to things like works of art.
Historically, gold has been viewed as a store of value and thousands of years ago was used as currency. Until 1971, the U.S. dollar was pegged to gold within the international currency system.
Today? Gold’s power as an inflation hedge is based mainly on past glory and is now dependent on people’s perception. Inflation concerns that boost gold prices can be capricious, impossible to time and can quickly fade with new information.
The chart below shows how gold’s price has a mixed record as a hedge against heightened inflation.
There are better hedges than gold during periods of higher inflation
Returns data presented on an annualized basis.
Sources: Ibbotson SBBI, London Bullion Market Association, Morningstar Direct
Stocks have proven to be a better long-term inflation hedge, as their returns have outpaced the rate of inflation more than gold over time. That’s just another reason to prefer exposure to stocks over gold in a retirement portfolio.
Gold’s “safe haven” status isn’t always rock solid
Because gold can be perceived as having enduring value, investors may flee to gold as a safe haven during times of market uncertainty and turbulence. But gold’s safe haven status in the market can vary depending on the circumstance.
Plus, the price of gold actually hasn’t been a stable source of value over time. Its volatility has been higher than stocks and considerably higher than U.S. Treasurys over the decades.
Our approach
Edelman Financial Engines constructs diversified portfolios across 16 major asset classes and market sectors. This includes stocks of commodities producers, such as gold miners.
Our diversified portfolios potentially benefit when these stocks rally along with their related commodities, like gold. But exposure is also limited, which helps protect the portfolio when the rallies fade.
Don’t try to time commodity rallies like the one we’ve seen in gold. Instead, we believe asset-class diversification helps lead to investment success.
Between 2000 and 2024, the average annual return of a hypothetical portfolio equally weighted across 16 major asset classes and market sectors would have been 7.3% per year. If you missed the best three asset classes each year, your return would have been only 3.6%.
A portfolio with many facets has a greater potential of sparkling over the long term, in our view.
The information provided is for educational purposes only and does not constitute investment, legal or tax advice; an offer to buy or sell any security or insurance product; or an endorsement of any third party or such third party's views. The information contained herein has been obtained from sources we believe to be reliable but is not guaranteed as to its accuracy or completeness.
Investing strategies, such as asset allocation, diversification or rebalancing, do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. All investments have inherent risks, including loss of principal. There are no guarantees that a portfolio employing these or any other strategy will outperform a portfolio that does not engage in such strategies.
Past performance does not guarantee future results.
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