The role of gold in an investor portfolio
Going for gold.
What Warren Buffett once described as a “useless” asset has regained substantial momentum in recent years, driven by a combination of macroeconomic, structural, and geopolitical factors.
Morningstar’s Manager Research teams across Asia recently released a report looking at the various gold investment strategies an investor can take to gain exposure to it beyond holding physical gold. The report also covers the pros and cons of investing in gold. This article shares select insights from the report.
Source: Going for Gold Asia. Morningstar. 2025.
The paper cites a combination of factors that may explain this.
Concerns around persistent inflationary pressures in the US and currency debasement from the increased money supply, as well as periods of negative real interest rates have bolstered the asset’s appeal as a perceived hedge against eroding purchasing power.
A weaker US dollar accompanied by rising geopolitical tensions (e.g. trade disputes and regional conflict) reinforced gold’s safe-haven status. Given recent market volatility, investors have turned to gold as a diversifier when looking to curb existing exposure to risky assets.
Simultaneously, certain investors have been drawn to gold purely based on recent price momentum – an approach that could lead to sub-optimal portfolio outcomes.
Gold in a multi-asset portfolio
Asset-class returns can fluctuate significantly over time. Incorporating a diverse range of asset classes can help temper portfolio risk and improve risk-adjusted returns through a cycle. Alongside equities, the inclusion of asset classes with historically low-to-negative correlation can contribute to more optimal portfolio construction outcomes.
The report presents a nuanced perspective on incorporating gold into a 60/40 allocation portfolio for Asian investors* running two scenarios:
- Scenario 1: Gold allocation financed by reducing equity exposure.
- Scenario 2: Gold allocation funded by reducing fixed-income exposure.
In Scenario 1, it was found that the portfolio experiences a notable decline in expected risk, and an associated improvement in the risk-adjusted returns as measured by the Sharpe ratio**.Although, given the lower potential return of gold compared to equities, the portfolio’s expected return falls very slightly.
Source: Going for Gold Asia. Morningstar. 2025.
On the other hand, in Scenario 2 where gold allocation was funded by reducing fixed income exposure, it meaningfully increased the portfolio’s expected risk with only slight increases in expected return. This presents a trade-off that investors must carefully consider.
Source: Going for Gold Asia. Morningstar. 2025.
Investment options
The paper focuses on funds and ETFs which offer a relatively cost-effective method to gain exposure without taking on derivative risk in other financial instruments like currency-linked investments or structured products.
Physical bullion can present storage and security concerns for investors. Passively managed gold funds and ETFs are an attractive option for those seeking a straightforward, low-cost way to incorporate gold into their portfolios without the complexity of holding physical bullion.
Such funds track the price of physical gold with each unit typically represents a fixed quantity and purity of securely stored gold. These tend to have low expense rations and small tracking error.
Whilst they offer simplicity and transparency, returns are entirely dependent on gold price movements and do not generate income. They also lack general diversification as they do not employ derivatives or active management strategies.
A discussion on gaining exposure through multi-asset funds and gold-mining funds is also available in the full version of the paper.
Things to consider
Investing in gold through an ETF offers a straightforward and cost-efficient way to gain exposure to gold prices, but like with every investment, there are factors to evaluate. These include expense ratios, tracking error and liquidity.
Investors should also confirm whether the ETF is backed by 100% physical gold or synthetic derivatives as there are nuanced differences between the two.
Some clarity amidst the chaos
Asset allocation has been championed as the primary driver of portfolio performance, with often-cited study Determinants of Portfolio Performance by Brinson, Hood and Beebower suggesting it accounts for almost 94% of returns.
Gold is often praised for its potential as a portfolio diversifier due to its historical tendency to enhance risk-adjusted portfolio returns. However, given its erratic short term price movements, the need for tempered expectations and a disciplined allocation strategy is essential.
At times investors regard short term momentum catalysed by major events as reason to act. As such, we should be mindful of investing in things based purely on price movements or herd behaviour.
It’s best to adopt a measured approach to incorporate gold, whilst carefully evaluating portfolio impact, as well as the various avenues for exposure. Gold funds, ETFs and gold-mining funds each come with distinct characteristics, including differences in cost, tracking error, liquidity and the active or passive nature of the investment.
Read the full report by the Morningstar Manager Research team: Going for Gold – Asia.
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*The “60% Equities/40% Fixed Income” portfolio refers to the flagship “Balanced” model in the published “Asset Allocation Methodology – Asia” paper. Detailed asset-class breakdown is as follows: 37% global equities, 23% Asia ex-Japan equities, 23% global fixed income, and 17% Asian fixed income.
**Sharpe ratio (author explanation): The Sharpe ratio is one of the most widely used measures of risk-adjusted relative performance. It subtracts the safe market return from the expected return of an investment and ultimately divides that by the standard deviation.
If you have two hypothetical investments that both return 10% p.a. over the long term, the investment with the higher Sharpe ratio provides better risk-adjusted returns on the basis of lower standard deviation. In basic terms, you get a smoother ride to the same destination (although this rarely occurs in practice). You can read more about standard deviation and the Sharpe ratio here.
