Young & Invested: Should you invest in gold?

Welcome to my column, Young & Invested, where I discuss personal finance and investing for Gen Z and Millennials.

This column aims to be a resource for young investors navigating an ever changing financial, political and social landscape as they try to build wealth. Tune in every Thursday for the latest edition.

Edition 24

I think a lot of us fall victim to analysing our portfolio retrospectively.

We often consider recent price fluctuations or patterns, catalysed by major events, as reason to act. This raises questions akin to the title of this article. Now I’m all for reviewing your strategy and resulting portfolio, however, I do take caution of the herd behaviour that sometimes occurs around assets that are rising in popularity.

The price surge of alternative assets like gold and Bitcoin is a great example of the investor-driven price appreciation that can occur amid global political uncertainty. But should you jump aboard the gold train to Neverland? Before you do that, it’s important to interrogate the why just as much as the what of investing.

What is happening to the gold price?

Gold is typically a safe-haven commodity during times of political and financial volatility. Morningstar analyst Jon Mills cites several tailwinds for the surging price of gold such as geopolitical tensions, tariff concern, and the US government’s deteriorating fiscal balance. Central bank purchases also remain elevated, particularly amongst emerging markets.

Figure 1: Central banks coming into the market in unprecedented levels. Source: Metals Focus, World Gold Council.

Trump’s tariff tantrums have also triggered a reallocation of global capital out of the US with investors seeking a safer alternative to US Treasures. The recent ‘Big, Beautiful Bill’ has sparked concerns about US debt levels after the Congressional Budget Office estimated it would increase US national debt by up to USD 3.3 trillion over the next decade.

The World Gold Council cites that consumer confidence and business investment has taken a hit due to economic uncertainty amidst Trump’s trade tariffs and new Bill. This has triggered a reallocation of global capital as investors seek safer alternatives to US bonds.

But why should we as investors care about this?

In the most simplistic way, the US has racked up so much debt, that it now spends more on interest payments than on defence. This ignites fears over the long-term debt serviceability and shakes confidence in the economy. Notably, credit ratings agencies have downgraded US debt ratings, signalling increased risk to investors.

This is where gold comes into the picture.

Higher levels of debt can lead to inflation or the weakening of the US dollar. Either of those outcomes makes treasuries less attractive which causes investors to look elsewhere for defensive allocations e.g. gold. An asset as old as time to store in the bunker when the inevitable apocalypse hits.

The role of gold in your portfolio

Strategic asset allocation

Something that Warren Buffett famously called a “useless” asset continues to hold space in many multi asset portfolios.

However, popular Robo-adviser Stockspot has a ~15% allocation to gold across all its portfolio offerings which is significantly higher than most diversified funds. This level of exposure is underpinned by Stockspot’s emphasis on strategic asset allocation. Ultimately, they believe 15% is the optimal allocation in the current environment, to complement the growth and defensive characteristics of the other assets.

I’d argue there isn’t a one-sized-fits-all answer. General consensus seems to establish that a 5-15% allocation is appropriate. But every investor will have a different set of goals and circumstances that will ultimately drive their strategy and asset allocation. For younger investors, the defensive nature of gold means most will likely have low or negligible exposure in their portfolio.

Why I don’t invest in gold

Diversification

I hold an all-growth portfolio meaning 100% is allocated to equities. But I can’t say I’ve never considered gold. Despite recent price appreciation, it’s important to ask yourself why you’re investing in something.

Investors have disparate views on diversification. Some think it is simply removing single security risk from a portfolio. Some view diversification as investing in assets that have inverse correlation – or simply put – finding ones that go up in value when others go down. These investors like gold as it has historically showed low or negative correlation with many traditional asset classes. This view of diversification and the logic of holding gold more closely resembles hedging.

Gold is often touted as an inflation hedge with higher interest rates and gold prices theoretically showing negative correlation. However, this relationship is not as straight forward in practice and is likely a combination of other economic variables. We saw this in 2022 when the US federal reserve passed down a series of rate hikes to quell inflation. During the same period gold hit all-time highs.

Furthermore, I’d argue that younger investors typically have the time to ride out inflationary cycles, therefore hedging is not a priority. Instead, such investors with longer time horizons should prioritise exposure to growth assets that generate higher long-term returns at the expense of short-term volatility.

Performance

Past performance is certainly not the be all end all, nor a reliable indicator of future performance – but it is still worth looking at. Below is a chart from VanEck that evaluates how gold measures up against other asset classes. We can see that in the short-term it has outperformed other asset classes. However, over the long term, equities came out the winner.

Figure 2: Gold performance versus other asset classes (1972 to 2025). Source: VanEck.

Figure 3: Gold spot price vs S&P 500 CAGR and risk (February 1992 to May 2025). Source: Curvo.

The table above from Curvo shows that the S&P 500 delivered a significantly higher compound annual growth rate than gold, albeit at a higher standard deviation (a common measure of volatility). But do I care about volatility? With a 40+ year investment horizon – not really.

An important takeaway from this is the higher Sharpe ratio for the S&P 500. This indicates investors would have got better risk-adjusted returns through the S&P 500 rather than gold. Obviously, these numbers are in isolation and do not reflect the risk adjusted returns of adding gold to a multi asset portfolio.

In his recent article Mark refers to gold as more of a directional bet than other asset classes. Given gold does not pay dividends and doesn’t make a profit or loss, the inherent price is largely driven by investor sentiment and the assumption that someone will be willing to buy the asset at a higher price.

This is largely where my discomfort stems from. I understand it forms a theoretical cushion for a portfolio during market shocks, but as someone with longer time horizon and no immediate need of my funds, it simply doesn’t make sense.

Morningstar gold outlook

The gold price has been on a run after rising almost 30% to USD 3,330 per ounce, close to historical highs. We believe safe haven buying is likely the main driver, with investors concerned about tariffs and geopolitical uncertainty, as well as the US fiscal deficit.

After a forecast update, we assume gold averages around USD 3,460 per ounce from 2025 to 2027. However, our midcycle gold price from 2029 is about USD 2,000 per ounce based on our estimates of the marginal cost of production.

Conclusions

Asset allocation has long been championed as the primary driver of portfolio performance, with a widely held study suggesting it accounts for almost 94% of returns. But my role here isn’t to drive your asset allocation decisions – merely provide some clarity around market chatter and how it may affect your decisions.

In my experience, the market loves to talk about things that are doing incredibly well with little context of how they may impact your portfolio. Gold is currently close to all-time highs which means you’re likely to get a lower return than others might have in the past. It’s important to evaluate this opportunity cost with present elevated prices.

There are a number of risks associated with investing in any asset class. In the case that the global financial system collapses tomorrow, then sure, I’d look pretty foolish not holding any gold. And there’s nothing wrong with holding a small allocation to gold as an insurance policy. But for now, I’m going to employ a healthy (and rare) dose of optimism.