Owning gold: the question shifts from ‘why’ to ‘why not’
Gold was not spared in the recent sell-off, but it tends to shine as crises drag on - its resilience should not be underestimated.
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Gold’s strong performance in recent years amid escalating geopolitical and macroeconomic risks has prompted many institutional investors to reconsider its role in diversified portfolios.
In 2024 and 2025 the metal outperformed all major asset classes, rising around 67% last year, eclipsing the next best performing assets class at 35% emerging market equities . The rally has continued into 2026, with gold rising well over 15% before recently pulling back.
Yet focusing solely on recent price moves is myopic and risks overlooking the multitude of roles that gold can perform in a portfolio, and how these improve resilience and performance across economic cycles.
Historical data illustrates this consistency. Gold has outpaced many traditional asset classes over the past five, ten and twenty years at rates comparable to equities and stronger than bonds and broad commodity indices. Since the end of the gold standard in 1971, gold has delivered an annualised return of 9% (for 55 years).
For long-term investors such as superannuation, sovereign, NGO and family office funds, this raises an increasingly relevant question: rather than asking why portfolios should hold gold, the debate is gradually shifting toward ‘why wouldn’t they?
Understanding gold’s unique ‘dual engine’
Gold can be misunderstood or hard to advocate for in portfolios because it does not fit neatly into traditional valuation frameworks. Unlike equities or bonds, gold does not produce earnings, dividends or coupons, meaning discounted cash flow models are not very relevant for gold. But this is also what gives gold one of its defining characteristics: with no issuer, it carries no credit risk and no counterparty exposure.
Instead, gold’s price is determined by the interaction of supply and a diverse set of demand drivers. These include jewellery consumption, technology use, retail and institutional investment and central bank reserve accumulation.
This broad demand base can be attributed to gold’s “dual nature”. On one hand, jewellery demand tends to strengthen during periods of economic expansion and rising incomes. On the other hand, investment demand rises when investors seek the diversification, liquidity and a reliable safe haven in periods of systemic risk. In more recent years, we’ve seen the investment case grow as concerns around fiscal debt deficits, trade uncertainty, and inflation have become entrenched in modern-day markets, prompting investors and central banks to revisit gold allocations.
Gold’s dual nature separates it from other assets with a more linear demand profile. Where most asset classes are subject to one dominant demand driver at one time, gold’s anti-cyclical, regional and increasingly structural demand forces often offset one another. Demand tailwinds in one region or segment may counteract headwinds elsewhere but the clear trend is that net demand supports gold’s stability over time.
While still considered far less volatile than most assets, gold can at times be the victim of its own success. During intense market sell offs, traders are likely to turn to gold’s highly liquid market to sell some holdings in order to quickly cover losses elsewhere in the portfolio, as seen recently when equities and bonds both sharply reacted in unison to geopolitical shocks. . But over time, these dips are typically refilled with new or revised gold demand.
Gold is being embraced as a strategic diversifier
Traditional portfolio construction has long relied on the negative correlation between equities and bonds. When inflation is low, this relationship has historically helped fixed income act as an effective diversifier against equity risk.
However, when inflation rises above roughly 2%, that relationship has often weakened, and in some periods reversed, reducing the diversification benefits of bonds.
Recent market conditions have reinforced this dynamic. During several recent inflation shocks, equities and bonds have moved in the same direction, prompting investors to reassess the role of alternative diversifiers within portfolios.
Gold, a scarce store of value with multiple demand levers, has historically performed well in these environments, offering both diversification and liquidity while also acting as a potential hedge against currency debasement, geopolitical risk and inflation.
Since 1971, gold has outpaced both the US and global consumer price indices, helping preserve purchasing power over the long term. Historically, when inflation has been between 2% and 5%, gold prices have risen by around 10% per year on average, with stronger gains during periods of higher inflation.
Gold’s ability to generate real returns is one of the key reasons why central banks continue to hold significant gold reserves as part of their monetary buffers. But gold’s appeal to central banks is more nuanced. In recent years, central bank gold purchases have reached multi-decade highs as reserve managers seek to diversify away from concentrated currency exposures, geopolitical risks, and sanctions risks. Another example where gold is sought for many purposes.
Improving portfolio efficiency
From a portfolio construction perspective, even a modest allocation to gold can improve risk-adjusted returns.
Analysis by the World Gold Council shows that adding a 5% allocation to gold within a hypothetical diversified US dollar portfolio (50% stocks, 40% fixed income, 10% alternatives ) over a ten-year period would have increased total risk-adjusted returns to 92.1%, compared to 84.6% for a portfolio without gold.
For superannuation funds and family offices managing long-term savings and retirement capital, this improvement in portfolio efficiency is particularly relevant.
Structural changes in gold investment make gold more accessible to more markets
The investment landscape for gold has evolved significantly over the past two decades. The development of gold exchange-traded funds (ETFs, the first on which launched in Australia in 2003), has made access to gold more efficient and transparent for both institutional and retail investors.
While Western markets still underpin much of global ETF demand, the next phase of growth is likely to come from Asia. China and India already account for more than half of global bar and coin demand, suggesting significant potential for ETF adoption to expand in these markets over time.
Notably, Australia plays a critical role in enabling gold to grow into a more accessible and investable global asset. Gold has now surpassed LNG and coal as the nation’s second biggest resource export behind iron ore, with exports expected to rise 47% to A$69 billion by the end of June, driven by higher demand and stronger prices. For the next financial year, gold’s earnings are expected to increase to $A74 billion, outpacing all other major AU commodities, including iron ore.
So, almost 200 years after gold changed the pace and trajectory of Australia’s economy, gold is once again an economic pillar in Australia.
Yet this national treasure remains a missing piece in many superannuation portfolios leaving investors on the sidelines, or worse, with the misconception that they are benefiting from gold’s surge indirectly through ASX or A$ exposure. The most direct exposure to gold comes in the form of physical ownership, whether it be bars & coins, jewellery or physical-gold backed ETFs, products and derivatives.
Call on industry to rethink gold
For decades, risk-off assets such as government bonds and the USD, offered reliable diversification against equity risk. These relationships have weakened, and in some periods broken down altogether. Rising inflation volatility, fiscal expansion and supply-heavy bond markets have altered how fixed income behaves under stress amid increasing questions about the long-term trajectory of the US dollar.
Diversification is not about owning different assets - it’s about owning assets that behave differently when it matters most. Gold has historically exhibited low to negative correlation with equities over long horizons, and unlike bonds, it does not rely on a government’s ability to manage inflation, its debt or deficits. This matters a lot more when markets are responding to intensified periods of volatility and uncertainty created by geopolitical risks at levels not seen in decades.
In this context, the debate facing institutional investors has evolved.
The question is no longer why portfolios should own gold? Increasingly, it is why wouldn’t we?
Click here for more insights by the team at World Gold Council
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Mun Fai has over 20 years of experience in the finance industry. Prior to WGC, Mun Fai was leading ETF sales in the South East Asia region for HSBC Asset Management and State Street Global Advisors respectively. Mun Fai began his career at Mercer Investment Consulting where he advised institutional investors on their investment programs including asset allocation policy and external manager selection process. Mun Fai holds the CFA and CAIA charters and is member of the CFA Institute and CAIA Association.
Mun Fai has over 20 years of experience in the finance industry. Prior to WGC, Mun Fai was leading ETF sales in the South East Asia region for HSBC Asset Management and State Street Global Advisors respectively. Mun Fai began his career at Mercer...
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Mun Fai has over 20 years of experience in the finance industry. Prior to WGC, Mun Fai was leading ETF sales in the South East Asia region for HSBC Asset Management and State Street Global Advisors respectively. Mun Fai began his career at Mercer...
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No areas of expertise
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