Gold has risen year to date, whilst global equities have fallen.ⁱ Does that make gold a good way to diversify portfolios? Fisher Investments UK reviews many investment strategies to assess what assets can benefit portfolios under myriad market conditions. Commentators we follow say inflationary conditions and financial stress make gold shine as a hedge – when other assets suffer, gold appreciates. But our research finds gold doesn’t reliably offer such protection.

Commentators we follow suggest war and inflation (economy-wide price increases) favour gold – and gold’s year-to-date outperformance seemingly proves the argument. But looking strictly at the precious metal’s leadership this year risks overlooking some factors worth considering, based on Fisher Investments UK’s reviews. For example, note that adding gold to portfolios introduces currency risk. Because global markets price gold in US dollars, much of gold prices’ strength for UK investors derives from currency translation. To see how currency effects mask gold’s relative weakness, gold has fallen -5.0% year-to-date through August in US dollars compared to its 10.6% gain in pounds.ⁱⁱ So far, this year’s currency effect benefitted investors in the UK, but that won’t always be the case, based on Fisher Investments UK’s reviews of market history.

Fisher Investments UK’s reviews also reveal gold hasn’t been a dependable inflation hedge or a hedge against market negativity historically. Over the last 49 years, gold’s effectiveness as an inflation hedge has been quite mixed.ⁱⁱⁱ Since 1973, the consumer price index, a broad basket of prices economy-wide, has risen in 474 months through August 2022.^iv Yet gold was up in only 264 of those months – 55.7% of the time.^v Statistically, gold has a 0.06 correlation with inflation.^vi The correlation coefficient is a statistical measure of the directional relationship between two variables. A correlation of 1.00 means they move together every month and -1.00 exactly opposite. Zero correlation – or close to it – implies no relationship. Meanwhile, gold doesn’t automatically rise during equity bear markets (typically prolonged and fundamentally driven declines exceeding -20%), either. In the last seven MSCI World bear markets, gold rose in three.^vii In our view, gold’s hedging capabilities are vastly overrated.

Over the long term, Fisher Investments UK’s reviews show why gold comes up short. Gold’s 6.5% annualised return – the yearly rate required to reach its ending value from inception – doesn’t compare favourably to global stocks’ 10.0% since 1973 when the gold standard fell.^viii Gold displays higher volatility, too. Gold’s standard deviation – the degree of fluctuation around its average annual return – is 23.9% versus stocks’ 17.9%.^ix This means over any 12-month time frame, about 68% of gold returns’ observations were within plus or minus 23.9 percentage points of its annual average – 6 percentage points more than stocks. So not only have gold returns historically been lower, they also fluctuate more. For investors seeking long-term growth to help fund their later years, we don’t see this as very desirable because it can decrease the likelihood of meeting their financial goals.

Beyond gold’s poor relative performance historically, research shows it is prone to big booms and busts that can last years – sometimes decades. Based on the US dollar because it is global commodities’ price standard, gold surged throughout the high-inflation 1970s, helping establish its reputation, before stagnating over the next two decades.^x From 2001, gold then rose, finally exceeding its 21 January 1980 peak on 21 January 2008 – 28 years later – and continued on to new heights until 2011, at which point it stayed below that level through June 2020.^xi Gold has been up and down since then, but is currently lower than mid-2020’s breakout (and 2011’s peak).^xii In practise, unless an investor is an expert timer with exceptional foresight, capturing gold’s upside appears exceedingly difficult to us. In Fisher Investments UK’s experience, investors are about as likely to catch gold on the wrong side of a boom-bust cycle.

Consider, too, why gold tends to lag long term alongside its unpredictable swings: the precious metal is simply a commodity, and its price moves on supply and demand. Whilst gold supply may be limited, we find demand can vary greatly and depend more on sentiment – buyers’ moods – than its commercial uses, subjecting it to greater price swings and undermining its attractiveness as a store of value. Stocks, on the other hand, give investors a share of corporate profits, which we have observed generally grow over time and in aggregate overall for broad equity markets globally. Because gold doesn’t have any inherent earnings or pricing power, stocks make better inflation hedges longer term, in our view.

Fisher Investments UK reviews gold’s historical performance and return variability and doesn’t find any redeeming characteristics from owning it in an investment portfolio.

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