Gold: A Review

Introduction

Gold as currency was first introduced in 550 BC, and to some degree, it has remained a functional part of financial systems ever since. Today, no country uses gold as the standard basis for its monetary system, though central banks, particularly those outside of the United States, have been gradually increasing gold reserves.

According to Morningstar, gold possesses no “fundamental intrinsic value,” meaning it does not produce a cash flow, and it does not maintain a promise of future repayment (Kelly, n.d.). Moreover, the economic utility of gold is limited. However, gold does have extrinsic value, which is defined as value of an object based upon perception and demand. 

Regardless of how gold is assessed and despite no country using it as a primary form of legal tender, it remains a tool for investment management. The rationale for investing in gold is multivariate, sometimes grounded in empiricism, while at other times being more than less apocryphal. 

Note that for the purpose of this paper, unless stated otherwise, gold refers to bullion and not investments in gold mining companies. 

Gold Supply

Supply and demand are the core drivers of gold pricing. Gold is an especially rare commodity. As of 2024, The World Gold Council (WGC) claims 216,615 tonnes of gold have been mined, with two-thirds of that volume extracted over the last 75-years (World Gold Council II 2025). The estimated current state of mined and un-mined gold is presented in the Total Available Gold Table. 

The annual new supply of gold is derived from three sources: mine production, hedging, and recycled gold (World Gold Council 2025).

Finally, the gold reserves of the world’s top ten central banks as reported by the Trading Economics (Trading Economics, n.d.) may be found below. 

Gold Reserves of Top 10 Countries

Investing

The primary means of investing in gold are: 

1. Direct purchase of gold
2. Buying shares of gold producers

Each form of investment has advantages and disadvantages. Disadvantages of direct gold bullion ownership include high costs in the form of commissions, shipping, and storage, ranging from 0.4% to 7.5% depending on the quantity. A further negative of bullion is its lower liquidity versus mining equities. 

However, the advantage of bullion is it exhibits low correlation and drawdown with equities. As such, ETFs that hold physical gold can be an effective means of reducing the costs of owning bullion and increasing liquidity while benefiting from low correlation and drawdown. Total expense ratios (TER) on ETFs range from 0.17% to 0.75%, with the SPDR GLD ETF TER currently at 0.40%. ETF commissions vary by broker but are generally below the rate on direct bullion (Conte 2021). 

In contrast to bullion, equities, in the form of mining stocks and mining ETFs, are low-cost options for accessing gold exposure. Mining equities and ETFs are not a direct play on gold, but are instead a semi-derivative position, insofar as the performance of the equity or ETF is partially, but not exclusively, derived from the value of gold bullion. In addition to the price of gold itself, equities and ETFs of gold producers are subject to company specific management and operational efficiencies. Moreover, mining equities and ETFs are considered leveraged plays on gold, and as with any leveraged investment, they carry the potential for outperforming bullion, while also being subject to greater levels of investment risk, particularly in the form of higher drawdowns and greater volatility (Conte 2021). 

Gold Bullion & the Portfolio

Gold bullion’s role in the portfolio is largely defensive due to its historical stability during stressful market events. Gold’s resiliency is principally a product of its low correlation with equities. For investors that elect to hold gold in their portfolio, Morningstar recommends “limited exposure” with a holding period of at least 10-years based on the “historical frequency of losses over various rolling time periods, and how long it takes to recover after a drawdown” (Arnott 2024). 

The following charts compare the performance of three equity indexes, all rebased in USD, with a gold price index. The inception date for analysis is 2 December 1989, unless otherwise stated, as it is the inception date of the S&P 500 TR Index used in the analysis. 

1. LBMA Gold Price PM USD—The index measures the performance of the setting price of gold. The gold fixing provides a recognized rate that is used as a benchmark for pricing most gold products and derivatives throughout the world's markets.
2. S&P 500 TR (1989)—The index measures the performance of 500 widely held stocks in the US equity market. Standard and Poor's chooses member companies for the index based on market size, liquidity, and industry group representation. Included are the stocks of industrial, financial, utility, and transportation companies. Since mid-1989, this composition has been more flexible and the number of issues in each sector has varied. It is market capitalization weighted.
3. Bloomberg US Agg Bond TR USD—The index measures the performance of investment grade, U.S. dollar-denominated, fixed-rate taxable bond market, including Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM passthroughs), ABS, and CMBS. It rolls up into other Bloomberg flagship indices, such as the multi-currency Global Aggregate Index and the U.S. Universal Index, which includes high yield and emerging markets debt.
4. MSCI EAFE GR LCL—The index measures the performance of the large and mid-cap segments of developed markets, excluding the US & Canada equity securities. It is free float-adjusted market-capitalization weighted.
5. 6040 S&P 500 TR.Bloomberg US Agg Bond TR USD—conservative 60/40 portfolio proxy.

Performance

From a total return perspective, over the period of analysis, the S&P 500 and a 60.40 portfolio of stocks and bonds significantly outperformed the LBMA index. Relative to the MSCI EAFE and Bloomberg US Agg index, the LBMA outperformed. However, the differential was not nearly as significant as the performance disparity between gold and the S&P 500 and the 60.40 portfolio. 

Correlation

Gold’s value in a portfolio appears to stem from its low correlation with equities. The period of analysis for correlation is from 1 January 1990 to 28 February 2025. During that time, the S&P was negatively correlated with the return on gold, while the MSCI EAFE GR was more strongly negatively correlated. There was a positive correlation between LBMA Gold and the Bloomberg US Agg Index, but it is still quite low, indicating that even in a fully fixed income US bond portfolio gold does provide diversification. 

Drawdown

The historical drawdown of gold is less extreme than the most extreme drawdowns for equities. In terms of drawdown, fixed income was the best performer, with its max drawdown occurring on 31 October 2022 at 17.18%. However, during that same period, US equities were down 17.7% and gold dropped 16.59%, reflecting an increase in the correlation of all assets during that period. The best performer was the MSCI EAFE dropping only 9.48%. 

An interesting point to observe is that gold does fall, but it is the timing of drawdowns relative to other assets that makes gold valuable. Save a few exceptions, including the current period, gold appears to experience its greatest corrections when equities are outperforming. Conversely, gold enjoys its strongest returns during periods when equities are under duress. This counter-cyclical performance is what one would hope to see as a defensive asset and can act as a pseudo floor during a stressed market. Over the analysis period, gold is not perfectly inversely correlated with equities, and does evidence periods of strong positive performance correlation, but generally, it does appear to protect value during stressful market periods. 

A less positive fact revealed in gold’s historical performance is that it takes much longer to recover losses following a large drawdown than equities, particularly US equities. This is the reason Morningstar suggests a minimum 10-year holding period for gold investments. 

Volatility

From a volatility perspective, gold’s standard deviation of returns is slightly greater than that of US and ex-US developed market equities and far greater than US fixed income. Therefore, on a risk adjusted basis, gold significantly underperforms US equities, US fixed income, and the 60.40 portfolio. However, it did outperform the MSCI EAFE on a risk adjusted basis. 

Inflation & Gold Bullion

Gold is frequently cited as an inflation hedge. According to the CFA Institute, empirical research from Duke University casts doubts on gold’s inflation hedging ability. Between 1990 and 2005, gold performance lagged inflation, failing to act as a hedge. Moreover, over the period of 1985 to 2005, the Consumer Price Index (CPI) was stable, while the return on gold was volatile (Harvey 2013). An analysis of gold shows that the R² for gold when regressed on inflation is only 15.5%, indicating that gold’s performance explains 15.5% of the variation in the performance of CPI (Harvey 2013). During the 20-year regression period, gold’s standard deviation of returns was 26.7% nominal and 23.6% real versus 2.9% for CPI (Harvey 2013). The paper’s conclusion was that gold was not a good short term or long-term inflation hedge, though it may be effective over “extremely long periods,” which is defined in the paper as the period of 27 B.C till 2005 A.D. (Harvey 2013).

During periods of hyperinflation, defined typically as inflation of greater than 50% per month, gold does appear to be a robust hedge (Kenton, Potters, and Perez, n.d.). Historical examples of gold’s role in hedging hyperinflation can be in Weimar Germany, during Zimbabwe’s hyperinflation crisis, during Venezuela’s economic collapse, and in Hungry post-World War II to illustrate but a few of several other periods of hyperinflation (Dewitt 2024). 

Bullion vs. Bullion ETFs & Gold Mining ETFs

Gold mining stocks, proxied here by the iShares MSCI Global Gold Miners ETF, do not maintain the same investment characteristics as gold bullion (LBMA Gold Price PM) or gold bullion ETFs (SPDR Gold Shares). The presented study serves to substantiate the rationale of treating mining companies as higher risk investments and not as a risk mitigation tool. This contrasts with gold insofar as gold is frequently cited as a defensive investment. The period of analysis is between 31 January 2012 through 3 March 2025, unless otherwise stated. 

Performance

Over the analysis period, the S&P easily outperformed both gold bullion and the gold miner ETFs. Gold bullion and gold bullion ETFs performed similarly, while miners returned -19.39%.

Correlation

Gold bullion and bullion ETFs were perfectly correlated over the holding period while maintaining a very low but positive correlation to US equities. Mining ETFs were more correlated to bullion and bullion ETFs than equities, but it is less than perfect correlation. The correlation between mining ETFs and the S&P was low at 0.22, but still far above bullion and bullion ETFs at 0.08. 

Drawdown

The drawdown on miners is significantly greater than the drawdown on bullion and bullion ETFs. At the bottom of gold’s rout in November 2015, when gold was down approximately 40%, the iShares MSCI Global Gold Miners ETF dropped 77.86%. The nearly 2x worse performance of mining ETFs suggest that investors in mining equities are much more exposed to gold price corrections than are the actual holders of gold. 

Volatility

The volatility, measured by the standard deviation of returns, of gold bullion, bullion ETFs, and the S&P 500 are approximately similar, ranging from 14.10 to 14.66%. However, over the analysis period, gold bullion and bullion ETFs only return 3.37% annualized, while the S&P returned 14.39%. Gold mining ETFs performed far more poorly than bullion or bullion ETFs, with a standard deviation of 36.38% and an annualized return of -1.95%. 

Conclusion

Depending on the investor, gold bullion may have a place in the portfolio. From a return perspective, it has lagged US equities and a 60.40 portfolio but has slightly outperformed ex-US developed market equities and a pure fixed income index. Gold’s greatest strength in a portfolio is its low correlation with US equities, ex-US equities, and fixed income. This low correlation has historically been especially beneficial during highly stressed markets and may serve as an effective source of capital preservation in crisis periods. However, gold is much slower than equities to recover from a steep drawdown, and for this reason Morningstar recommends a holding period of at least 10 years. Finally, gold has exhibited high volatility, which when adjusted for returns, results in lower risk adjusted performance vs. US equities and fixed income. 

For investors looking for gold performance without holding direct bullion or bullion ETFs, mining stocks and mining ETFs may not be a suitable alternative. A study of the iShares MSCI Global Gold Miners ETF, used as a proxy for mining equities, revealed that over the analytical period, mining ETFs do not maintain the same investment characteristics as gold bullion. Gold miners may be better suited for investors seeking higher risk and potentially higher reward opportunities in the form of greater speculative derivative exposure to gold bullion. Thus, the oft cited rationale behind adding gold bullion to a portfolio, particularly as a low to uncorrelated defensive position, is not transferable to equities of gold mining companies. 

As Henry Markowitz said, “Diversification is the only free lunch.” Gold has historically provided portfolio diversification, and on that basis, it may be a worthy addition to an investor’s portfolio with the caveat that a 10-year plus investment period is recommended.

Sources:

Arnott, Amy C. 2024. “How to Use Gold in Your Portfolio.” Morningstar, Inc. February 27, 2024. https://www.morningstar.com/portfolios/how-use-gold-your-portfolio.

Conte, Niccolo. 2021. “Getting Gold Exposure: Bullion vs. ETFs vs. Mining Stocks.” Elements by Visual Capitalist. March 31, 2021. https://elements.visualcapitalist.com/getting-gold-exposure-bullion-vs-etfs-vs-mining-stocks/.

Dewitt, Ron. 2024. “Historical Case Studies of Gold’s Performance During Hyperinflationary Episodes - Ron Dewitt | Precious Metals Specialist.” May 20, 2024. https://rondewitt.com/historical-case-studies-of-golds-performance-during-hyperinflationary-episodes/.

Harvey, Campbell R. 2013. “The Truth about Gold: Why It Should (or Should Not) Be Part of Your Asset Allocation Strategy.” CFA Institute Conference Proceedings Quarterly 30 (1): 9–17. https://doi.org/10.2469/cp.v30.n1.9.

Kelly, David. n.d. “Gold Has No Intrinsic Value.” Morningstar UK. Accessed March 5, 2025. https://www.morningstar.co.uk/uk/news/120804/gold-has-no-intrinsic-value.aspx.

Kenton, Will, Charles Potters, and Yarilet Perez. n.d. “What Is Hyperinflation? Causes, Effects, Examples, and How to Prepare.” Investopedia. Accessed March 6, 2025. https://www.investopedia.com/terms/h/hyperinflation.asp.

Trading Economics. n.d. “Gold Reserves - Countries - List.” Accessed March 5, 2025. https://tradingeconomics.com/country-list/gold-reserves.

World Gold Council. 2025. “Gold Demand Trends: Full Year 2024.” World Gold Council. February 5, 2025. https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-full-year-2024.

World Gold Council II. 2025. “How Much Gold Has Been Mined?” World Gold Council. February 11, 2025. https://www.gold.org/goldhub/data/how-much-gold.

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