With the price of gold increasing roughly 25% so far in 2025, as of late April, many investors may be wondering about the investment properties of gold, and precious metals in general, as an asset class. Gold can be held both in the physical form, such as bars or jewelry, or by buying an investment fund such as SPDR Gold Trust ETF (GLD) that closely tracks the price of the underlying metal. There are more reasons cited by proponents of holding gold as an underlying rationale for long-term appreciation than we can cover here, but this post will touch on a couple prominent ones such as gold being an inflation hedge and a safe haven during turbulent stock markets.
The idea behind gold as an inflation hedge is that, since gold is a finite resource, increases in the underlying price level of all goods should correspond to increases in the price of gold. By holding gold as a portion of an investment portfolio, one could potentially see less erosion of purchasing power if cost-of-living inflation is significantly higher than expected.
In a 2024 paper by Cam Harvey, professor at Duke University, and Claude Erb, former managing director of TCW Group, the authors explore the relationship between gold prices and inflation since gold began trading as a commodity in 1975. While there is a general positive correlation between the Consumer Price Index (CPI) and the nominal price of gold, the relationship is so unstable and volatile that gold cannot be considered anything close to a perfect hedge. Indeed, when comparing the volatility of changes in the CPI to the volatility of gold prices, the real (inflation-adjusted) price of gold experiences such large price changes in comparison to inflation rates as to be an unreliable hedge.
A good inflation hedge should move in a positively-correlated manner with inflation rates. When inflation goes up, so should the hedge against high inflation. However, we have seen periods historically where gold prices decrease during rising inflation and where gold prices increase as inflation comes down. In addition, shorter time horizons have seen gold occasionally perform quite well as an inflation hedge. According to the research authors, the holding period required to be reasonably confident in getting a meaningful hedge against long-term price level increases is so long as to be impractical for portfolio construction.
Another theory and rationale are that gold can provide a safe haven for investors during bear markets for stocks. When stocks markets aren’t performing well or experience increased volatility, a common reaction is to search for “safer” assets that won’t lose as much as value or fluctuate as much, typically U.S. Treasuries or precious metals like gold.
Again, a hedge against bear markets should see an increase in value when stock markets tank and a decline in value during bull markets. However, according to Ned Davis Research, in the 12 bear markets since 1980, gold prices increased in half of them and declined in the other half. It appears to hardly be a good hedge against stock markets falling if the historical precedent is a 50/50 chance of the hedge performing as desired.
Another consideration of owning gold, and precious metals in general, is the lack of underlying intrinsic value or earnings when compared to owning shares in a company instead. Gold does not generate any yield/earnings or pay any dividends or interest and has additional costs of physical ownership including storage and insurance (this is less of an issue for jewelry pieces and token items than it is for meaningful quantities of physical gold). In that regard, the return on metals—solely derived from price appreciation—is somewhat dependent on the greater fool theory in finance, which suggests that you can make money speculating on unprofitable assets by assuming someone else (a “greater fool”) will pay a higher price for that asset in the future, regardless of intrinsic value. The crowd psychology effects of this phenomenon are outside the scope of this article, but it is important to recognize the difference between how gold yields a return versus how stocks and bonds do the same by paying dividends or interest and generating economic earnings.
The multi-decade performance of gold has averaged roughly 8% annually, although performance averages can vary significantly depending on the period examined. While the stock market does experience higher volatility, the long-term returns of the S&P 500 are significantly higher (close to 11% annual average total return for the same time period) and thus compensate investors for being able to stick with their financial and investment plans during that volatility. Coupled with the underlying economic benefits generated by holding ownership shares in the best corporations in the world, holding stocks for the long term has been a significantly better hedge against inflation than gold and a more profitable component of investor portfolios.
It is not uncommon for an asset that has had good recent performance to make headlines across the financial media. Similar to recent frenzies around Bitcoin and meme stocks, we remain focused on constructing portfolios for the long term, using diversified baskets of equity investments to achieve the long-term returns needed for clients to meet their financial goals. While there will always come another hot investment du jour, remaining focused on the underlying economics driving market performance can help position investors for positive outcomes no matter the short-term environment.
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