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Gold as the great diversifier

Published on 05-21-2025

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Low correlation to equity markets

 

Gold has been on a tear. It’s up 60% since the start of 2024 as of April 30, and in Mid-April it reached an all-time high of just over $3,400 per ounce. For some investors with allocations to gold, the timing of this exceptional performance has been great as “tariff talk” has rattled equity markets. But the outstanding recent performance is not what makes it a valuable asset for your portfolio. So why do we like gold as an occasional alternative to equities? Because there is potential that having gold in your portfolio will reduce downside if markets drop and can provide some upside if markets rise.

Gold has typically been seen as a haven during times of market uncertainty because returns have low correlation to stock market returns, meaning that movements in stock markets are not related to moves in the price of gold. Since 1980, the correlation between gold and the S&P 500 is almost zero, at 0.01. The following table shows how gold is correlated with other major North American indexes. The S&P/TSX has the highest correlation given the number of gold mining companies listed on the exchange.

Central banks generally buy gold as a store of value, it’s a hedge against inflation and currency devaluation and considered a safe asset during uncertain economic times.  Central banks have been buying record amounts of gold over the past three years, helping drive the price increase. The World Gold Council reports that central bank purchases have topped 1,000t in each of the past three years, averaging net purchases of 1058t over that span. This easily passes the average annual purchases 481t between 2010 and 2021 of.

We are likely to see some mean reversion in gold purchases in 2025 as it’s unclear if banks can keep up the pace of buying we’ve seen over the past few years, but it’s safe to say the global economy has not become more stable since the start of 2025.

Gold is a great diversifier

A discussed above, it has almost zero correlation to equity markets, but we know that most asset classes tend to be more highly correlated during major downturns, or tail-risk events. Correlations during tail-risk events tend to be much different than during normal market conditions, and prudent risk management says you should focus on tail events to avoid catastrophe. So how does the gold-S&P 500 correlation look over the worst periods for equity markets?

Since the start of 2007, during the worst 5% of daily S&P 500 returns (tail events), the correlation with gold is slightly negative at -0.015, a move in the right direction. During the five most recent major drawdowns for the S&P 500, gold has had a better return in all of them, beating the S&P 500 by an average of 35% over these stretches and posting a positive return in three of the five downturns.

Indeed, gold is a good diversifier and risk management tool during tail-risk events and can help your returns over those periods. But it won’t always help your returns. The following table shows how a 5% allocation to gold would have helped returns and lowered standard deviation for the period ending April 30, 2025.

But if you look at the decade of the 2010s as an example, the 5% allocation to gold would have slightly hurt returns over most time frames. 

That’s where a rules-based tactical asset allocation can be very effective. If you can add to your gold allocation during major market downturns based on weak quantitative signals, and shift back to equities when signals are strong, you have the potential to reduce downside and come out ahead.

Reid Baker, CERA, ASA, is the founder and CEO of ForAll Investment Research. He created the ForAll Core & More U.S. Equity Index, which is tracked by the ForAll Core & More U.S. Equity Index ETF (FORU).

Notes and Disclaimers

Content copyright © 2025 by ForAll Investment Research Inc. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited. This article is used with permission on this website. All investing is subject to risk, including the possible loss of the money you invest. Be aware that fluctuations in the financial markets and other factors may cause declines in the value of your account. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income. Diversification does not ensure a profit or protect against a loss.

Image: iStock.com/tadamichi

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