Gold in a Multi-Asset Portfolio: A Primer for Long-Term Investors

Gold has been one of the most discussed assets of the year. Prices have risen sharply, reaching record highs and outperforming many global equity indices. This has naturally prompted charity trustees, investment committees and institutional investors to ask whether gold now warrants a place - or a larger one - within a diversified portfolio.

As fiduciaries responsible for long-term capital, our clients are not motivated by short-term market narratives or speculative excitement. Their priorities are resilience, liquidity, diversification and inflation protection over multi-year horizons. It is therefore important to ground any discussion of gold in its long-term return profile.

Historical evidence from the Dimson, E., Marsh, P. and Staunton, M. Global Investment Returns Yearbook highlights that gold has generated very modest real returns over the long run, despite its reputation as a store of value. Since 1900, gold delivered an annualised real return, pre-costs, of just 0.76%, only marginally above Treasury bills and far below equities and bonds. Yet gold’s volatility has been high, with annual fluctuations comparable to global equities.

This note therefore aims to provide a clear and balanced overview of the role gold can play for long-term investors: why it has been performing so strongly, where it can augment portfolio resilience, and where its limitations require caution in setting strategic allocations.

What follows is not investment advice and should not be taken as a recommendation to buy or sell any specific asset. Instead, it is intended to share general principles and observations about portfolio resilience and governance. 

Why Gold Has Risen So Strongly

The recent rally in gold has been remarkable. While gold often performs well in periods of uncertainty, the drivers today extend far beyond simple “risk-off” behaviour.

Central banks have been the dominant force, steadily increasing their gold reserves as part of a broader diversification away from the US dollar. In some cases, most notably China, actual purchases are believed to be far higher than officially reported, reducing available supply and providing a persistent underpin to prices. For investors, this shift by traditionally conservative reserve managers signals a meaningful and long-term recalibration of global asset preferences.

At the same time, geopolitical fragmentation has strengthened gold’s role as a politically neutral store of value. Since the freezing of Russia’s foreign reserves in 2022, many countries have reassessed the political risks embedded in dollar-based assets, enhancing gold’s appeal as an asset with no counterparty exposure.

For multi-asset investors, the environment has also been defined by patches of elevated correlation between equities and bonds, which has weakened the effectiveness of traditional diversification. Gold, by contrast, continues to exhibit low long-term correlation to both asset classes, which has supported renewed interest from investors seeking resilience.

Finally, while retail demand has contributed short-term momentum, particularly in physical markets, this is secondary to the more strategic forces at play.

The Role Gold Can Play for Institutional Investors

For investors with long-term liabilities, spending commitments and a need for capital preservation, gold can serve several strategic functions. However, these should be understood in the right context - not as promises of protection, but as potential contributors to portfolio resilience.

A source of diversification that behaves differently

Unlike equities or bonds, gold is not driven by earnings, interest rates or credit cycles. It is influenced by monetary expectations, geopolitical shifts and supply/demand imbalances. Because these forces often diverge from traditional markets, gold can help smooth volatility across a full market cycle.

A store of value when confidence in financial assets is tested

Gold can be a useful asset during periods when confidence in traditional financial markets weakens. Although it offers no yield, it has historically provided protection in extreme scenarios, such as geopolitical shocks, persistent inflation, currency pressure or stresses in the banking system, when the usual sources of portfolio stability, like government bonds or cash, may come under strain.

Its behaviour in equity sell-offs is often misunderstood. Gold does not always rally at the first sign of market stress; in the early phase of a downturn, investors may sell gold simply because it is one of the most liquid assets available. But over the full course of major drawdowns, gold has tended to hold its value more effectively than equities and has frequently finished such periods in positive territory. This pattern, initial softness followed by relative resilience, means that gold can play a useful role in cushioning multi-year portfolio outcomes during deep or prolonged market stress.

A complement to inflation-sensitive assets

Gold is not a perfect month-to-month inflation hedge, but it has preserved purchasing power over long periods and has tended to perform best when inflation is persistent or when confidence in monetary policy is in doubt. Given the fiscal pressures facing many developed economies, and structurally higher government expenditure, this longer-term characteristic is relevant for institutional investors.

Risks and Considerations

Despite its merits, gold is not a perfect asset. Trustees and committees should be aware of its limitations:

• Gold is volatile and can experience sharp short-term swings, especially when driven by momentum or unwinding of speculative positions.

  
  

• It produces no income, which may be a disadvantage for income-dependent organisations unless balanced by yield-generating assets elsewhere.

  
  

• Gold’s inflation protection is inconsistent in the short term.

  
  

• Periods of crowding - such as the present one - can create vulnerability to reversals.

  
  

• It can fall initially during market stress before stabilising.

How PMCL Thinks About Gold

At PMCL, gold is not a natural starting point when we think about portfolio construction or risk. Our approach begins with the principles set out in our Foundations articles which you can find here and here.

Within that framework, gold is not a core building block in the way that equities and bonds typically are. However, for actively managed portfolios, it can have a legitimate place as part of a broader alternatives allocation, provided the role it plays is clearly defined and justified within the overall risk budget.

In this context, gold may be considered as a potential resilience asset:

• one with low correlation to traditional assets,

  
  

• with the capacity to behave differently during periods of market stress,

  
  

• and with characteristics that can help to dampen portfolio volatility during extreme scenarios.

But these potential benefits need to be balanced carefully against its limitations: long-term returns that have historically lagged equities and bonds, relatively high volatility, no income generation, and ethical or sustainability considerations that may be relevant for some charities.

Implementation also matters. The way gold exposure is held (physical, ETC, fund-based, hedged or unhedged) has material implications for liquidity, cost and risk. Historically, allocating to gold was more operationally complex due to the need for physical custody, secure storage and insurance, all of which increased cost and created practical barriers for many investors.

The growth of ETC and ETF structures has made implementation significantly simpler. These vehicles offer easy access, daily liquidity and operational efficiency, and have become the default route for most institutional and charity investors. Ongoing costs vary by provider, but many of the commonly used ETCs sit in the region of 10 to 20 basis points, making them comparatively low-cost versus traditional storage arrangements. The improved accessibility and liquidity provided by these products has also likely contributed to broader demand for gold exposure over the past decade.

For most long-term charity and institutional investors, the key question is not whether gold will rise from here, but whether, as part of a carefully sized alternative allocation, it could enhance portfolio durability under certain macroeconomic or geopolitical conditions.

It is not an automatic inclusion, and in many cases the starting point may still be to say “no”. But in specific circumstances, with a clear purpose, appropriate sizing and prudent implementation, gold can play a supporting role within a well-diversified portfolio.