Gold – Hype, Hedge, or Helpful Diversifier?

Gold has had a volatile start to the year. Prices surged to $5,500 per ounce by the end of January, fell sharply to $4,400 in early February, and have since stabilised around $4,800. The swings have been dramatic, reigniting interest in the precious metal and prompting a well debated topic: what’s driving the rally, and does gold deserve a place in a long-term portfolio?

What’s driving the gold price.

Gold is often criticised as an “unproductive” asset. Unlike shares, bonds, or cash, it doesn’t generate income — no dividends, interest, or coupons. Its value depends purely on what another investor is willing to pay, leading critics to argue that gold has no intrinsic value.

That’s one perspective. Recent performance highlights another: despite lacking cash flows, gold can still deliver strong returns under the right conditions.

Several factors are currently supporting prices:

Central Bank Demand

One of the strongest tailwinds has been increased central bank buying. Gold now accounts for 21% of global reserves, up from 11% in 2017. This reflects a strategic move to reduce reliance on the US dollar, an understandable response given uncertainty surrounding US economic and fiscal policy.

Rising Debt and Investor Uncertainty

Growing government debt and a lack of fiscal restraint have unsettled investors. At the same time, rising long-term interest rates have weakened confidence in government bonds, traditionally viewed as safe havens. Against this backdrop, gold has attracted investors looking for an alternative store of value.

A Weaker US Dollar

As a dollar-priced commodity, gold benefits when the US dollar depreciates. During 2025 and into 2026, a weaker dollar helped fuel a broader rally in commodities, with investors seeking returns through currency effects.

Gold’s role in a diversified portfolio

Is Gold an Inflation Hedge? Gold has one of the longest investment track records in history, providing more than 2,500 years of data. Over that time, research suggests gold has broadly preserved its purchasing power after inflation.

As the chart shows, gold’s ability to outpace inflation varies meaningfully from year to year. Looking over the longer term tells a similar story. Since 1900, gold’s annualised real return has been around 0.76%, suggesting that while it can help preserve purchasing power over time, it has not consistently provided strong inflation-adjusted growth.

Is Gold Really a Safe Haven?

Gold’s reputation as a safe haven is often overstated.

• Over the long term, equities have produced higher returns with lower volatility than gold.

• Compared to government bonds, gold has delivered higher returns, but with significantly greater risk, weakening its defensive credentials.

During market stress, outcomes are mixed. In the COVID-19 sell-off, gold fell less than equities but failed to provide the protection offered by government bonds. By contrast, in December 2018, when global equities dropped 6.7% amid concerns over rising interest rates and US-China trade tensions, gold rose 5.2%.

What gold does offer is diversification. It has low to near-zero correlation with both equities and bonds, meaning it can behave differently when traditional assets move in the same direction.

Correlation Table
Asset Name	Physical Gold Correlation
Global Government Bond	0.25
Global Equity	0.00

Source: FE Analytics

Final Evaluation

• Equities remain the strongest long-term driver of wealth.

• Bonds offer better risk-adjusted returns and defensive characteristics.

• Gold can act as a useful diversifier in certain market environments.

Holding a small allocation to gold alongside equities and bonds can improve a portfolio’s overall risk-return profile. However, caution is essential. Buying any asset simply because it has performed well recently is not a strategy, it’s speculation dressed up as investing.

Please note: Gold may not be suitable for all investors. Any allocation should reflect your individual objectives, risk tolerance, and investment horizon. Gold should not be considered inherently portfolio-enhancing, and past performance is not indicative of future results. Always consider seeking professional financial advice before making investment decisions.