The Benefits of Gold Within an Investment Portfolio

May 26, 2021

At a time when investors can short Bitcoin and buy an ETF that bets on self-driving cars, a centuries-old currency is standing tall.

The price of gold ended May 27 above US$1,900 per ounce, just months after reaching its all-time high of $2,070. After a decade languishing in bear market territory – it slumped to $1,060 in 2016 – gold bullion is now back in favour thanks to fears around inflation and the sustainability of the post-pandemic recovery.


With the economy unbalanced by huge amounts of fiscal and monetary stimulus, bond markets offering little yield, and signs the stock market rebound is running out of gas, investors have fallen back on civilization’s oldest store of wealth.

Its price has risen 8% since Q2 and the man known to many as the “Godfather of Gold”, State Street Global Advisors’ chief gold strategist George Milling-Stanley, believes this shows investors are taking inflation risks seriously.

And even if you think, like the U.S. Federal Reserve, that these risks are transitory, there is logic to thinking the economic recovery will follow suit and slow down. “You look for safe havens and real assets when these are areas of concern,” Milling-Stanley said.

But what are the benefits to a portfolio allocation in gold? Why is it regarded as a hedge against inflation, and how do you get exposure? To understand gold as an investment, one needs to know its history.


While already used for jewelry, gold started as a currency around 560 B.C. when merchants wanted a standardized form of money to simplify trade. The creation of a gold coin stamped with a seal provided the solution and the new currency’s importance subsequently grew throughout the Greek and Roman Empires.

Great Britain developed its own metals-based currency in 775 (the pound symbolizes a pound of sterling silver) and, eventually, gold came to represent wealth throughout Europe, Asia, Africa, and the Americas. In 1792, the U.S. government established the bimetallic standard that stated every monetary unit had to be backed by either gold or silver.

This didn’t last and during the 1900s, the “gold standard” was transitioned out of the monetary system. The Gold Reserve Act of 1934 gave the U.S. government title to all gold coins in circulation and put an end to the minting of new ones. Thus began the idea that gold was no longer necessary in serving as money.

Now, of course, it doesn’t back any worldwide currency but is still a proven way of preserving wealth. Unlike paper currencies, its value increases. For example, ten dollars in 1971 bought you a lot more then than it does now. For proof of gold’s value-holding ability, look no further than the balance sheets of central banks, which own almost one-fifth of the world’s supply of above-ground gold.

Why is this context important? To show that gold has not only held its value over thousands of years but that it’s still trusted to do so – even in a world of blockchains and digital wallets.


Thanks to its ability to preserve wealth, gold is often used as a store of value and a safe haven in times of political or economic uncertainty. Hans Albrecht, of Horizons ETFs, calls gold “old math” when comparing it to the “new math” of governments and central banks.

He believes that low interest rates, which affect fixed-income yield, only reinforces gold’s role. He added: “Gold, in the end, is the millennia proven way to hedge against some of this new math – the financial engineering, money printing and assault on fiat currencies – and a zero-rate environment makes that easier.”


Inflation hedge

Given the amount of stimulus in the economy, and the speed of the COVID-19 rebound, inflation is set to rise. By how much and for how long, no one knows for sure, but we do know the Fed is willing to let it run in order to spur economic growth and achieve its 2% average target.

As inflation rises, the $20 in your wallet will buy you less. The purchasing power of gold, however, has proven more stable than fiat currencies over long periods of time.

But not everyone considers gold as the best protection against inflation. Tyler Crowe, of The Motley Fool, highlighted Robert Johnson and Luis Garcia-Feijoo’s book Invest with the Fed, which analysed the performance of stocks and gold in times of rising rates that typically accompany inflationary periods. Since the end of the “gold standard” in 1971, stocks returned 8.47% versus 4.86% for gold. This represents a lower return for equities than when rates are falling or flat, but still a more attractive return than the precious metal.

Past performance is no guarantee of future results, of course, and investors must ask themselves whether today’s stock market recovery will continue, if they can stomach the volatility, and whether gold is, comparatively, a more suitable hedge for them.


When the stock market crashes, an investor wants non-correlated exposure to smooth out the ride (e.g., when one zigs, the other zags). Anyone 100% in equities in 2020, for example, could have suffered up to a 30% loss across their portfolio. Those smart enough to diversify across asset classes, including hard assets, got hurt less.

Traditionally, gold has a low or negative correlation to other assets. Renowned investor Ray Dalio, founder of Bridgewater Investments, stressed that diversification is vital. “First of all, you have to be global, and you have to have balance; I think you have to have a certain amount of gold in your portfolio, or you have to have something that is hard.”

How much should you allocate? A consensus view is that 5% is where most people feel comfortable, although goldbugs will advocate for more. Stage of life and individual risk tolerance affect this, of course.

Nick Barisheff, CEO of BMG Group, is naturally vociferous about gold’s strengths. “You have a lot of writers and CFAs [talking about owning] small cap, large cap, international … but the thing is, all equities and even equities with bonds are correlated, so they all tank together. Diversification amongst all kinds of different stocks is no diversification whatsoever. When you have gold, it is – it has lower volatility and improves returns.”


The price of gold tends to drop during times of prosperity: it sunk to $208 an ounce in 1999. However, the 21st Century has been the yellow metal’s time to shine. From March 2000 through March 2021, gold generated an annualized return of 19.1%. Adjusted for inflation, that comes to 14.7% annualized.

This emphasized its safe haven status. While the stock market grappled with three crises – the tech bubble, the global financial crisis and now the pandemic – returning 6.8% annualized (including dividends), over the same period, gold outperformed.

In times of stress for stocks, gold can not only be an effective diversifier but also enhance returns.


Buoyed by a surge in price, Bitcoin is vying to prove itself as a credible store of value. Highly speculative, that status appears out of reach at present amid wild volatility.

When Bitcoin’s price sunk recently, and gold’s rose towards the $2,000 mark, some believed there was a correlation between the two, while media continued to hail the digital token as an alternative inflation hedge.

Milling-Stanley dismissed any link between the two currencies and said over its 12-year life span, Bitcoin has been 10 times more volatile than gold. “They do very, very different jobs. Gold will reduce your risk and increase your returns over time, and cryptos, with their volatility, to my mind are not going to become the long-term strategic allocation of choice.”


The best-known method is arguably direct ownership. Most of us visualize large gold bars held in a fortified safe but it is also stored in smaller-sized bars and coins, all with serial numbers. Depending on the size, these can be illiquid and costly to buy and sell. On top of that, storage and insurance costs can be significant and impact profitability.

For the average investor, the more cost-effective alternative is to invest in gold-only ETFs or mutual funds, which buy you a share in a fixed amount of gold. These funds can be bought and sold like any stock. Other funds are more diversified across different metals and other commodities, while some invest in gold mining companies or are tied directly to gold prices.

Barisheff blames gold ETFs for creating an “illusion” and diverting investors away from examining the benefits of owning physical gold. What good is it to save money on the storage costs if you don’t have legal title to the gold, he argued, adding that ETFs are mere paper proxies that may fail under stress, diminishing their resiliency.

It’s a purist view, and owning physical gold is just not feasible for many investors. Nevertheless, it’s an opinion worth remembering when considering the essence of gold investing.


Gold is a wise old sage compared to new-born cryptocurrencies; a status recognized by investors who routinely flock to the yellow metal in times of turmoil. That’s a reputation hard won over thousands of years.

For investors, the key is in understanding the roles gold can play in a portfolio. It’s a proven diversifier with low correlation to stocks, and its ability to hold value makes it a viable hedge against inflation and the erosion of fiat currencies. On top of that, it has the ability to enhance returns historically, when equities struggle.

Don’t be one-eyed, though. Gold has been volatile and experienced some lean years, especially during prosperous times. But at a time of rising inflation and uncertainty over the long-term impact of governments’ stimulus programmes, an allocation to gold could add some valuable protection to your portfolio.

Fabien Ouellette
Portfolio Manager

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