This article was taken from the May 2025 issue of Market Insight. To subscribe to our investment publications, please visit www.redmayne.co.uk/publications.
Amidst recent market volatility, few asset classes have shone brighter than gold. Over the last year, the precious metal has risen 37.8%, capturing the eye of investors looking to cash in on the upward price momentum. Often seen as a ‘safe haven’ defensive asset and hedge, a protective position, to both inflation and geopolitical volatility, many make the case for its inclusion in portfolios. Others, however, take the opposite side, reluctant to allocate funds to what they consider an unproductive asset.
Taking stock of performance, those with long-term holdings in the asset have benefited. A recent London Stock Exchange Group (LSEG) research paper indicated a multi-asset portfolio with an allocation to the precious metal would have generated both higher absolute and risk-adjusted returns compared to a portfolio with no gold allocation between 2010 and 2025. Interestingly, the divergence of returns between the two portfolios outlined in the paper became evident during 2022 amidst the increases in inflation that caused considerable underperformance of the traditional ‘safe haven’ assets such as government bonds. During this period, gold proved its ‘safe haven’ nature, producing flat returns for the 2022 calendar year, while a UK government bond index lost more than 20% of its value.
While gold proved stable in 2022, returns still lagged behind the rate of inflation, calling into question the inflation hedging capabilities of the precious metal. A simplistic view may be that an inflation hedge should move with inflation, in that when the inflation rate rises, so should the price of the asset. One entry to the CFA Institute’s blog sought to test this relationship for gold. Taking data from 1979 through to 2024, the author found an unstable relationship between the gold price and inflation, with periods where the relationship is both positive and negative. The previously mentioned LSEG research paper also tested the relationship, finding that gold produces its strongest returns in moderately high inflationary periods of 0.4% or higher monthly and that while inflation is a key input, it’s not the sole force driving performance.
Aside from inflation, other influencing factors include retail, technological and investor demand, alongside central bank buying. The latter has reportedly been a significant influencing factor on gold’s performance. In its recent gold demand publication, the World Gold Council indicated significant increases in the level of central bank demand with the 5-year quarterly average volume of net purchases eclipsing the longer-term average prior to 2022. Key buyers include the National Bank of Poland and People’s Bank of China, looking to bolster strategic reserves. Investor demand also remains buoyant, with financial services provider State Street and the World Gold Council indicating significant increases in assets under management within global gold exchange traded funds.
In assessing the appropriateness of gold as an addition to a portfolio, multiple considerations are required. Strategic demand from central bank buying remains strong against inelastic supply and providing long-term support for the asset price. Investor demand, through physically backed exchange traded funds, remains more volatile and subject to changing sentiment. Claims of the asset being a hedge for inflation are less clear, with studies neither supporting nor rejecting blanket claims.
Overall, viewpoints on gold are expected to continue to differ. Longer-term strategic holders are likely to echo points made above and improved returns through holding the asset, while others continue to rebuff inflation hedging claims.
Please note that this communication is for information only and does not constitute a recommendation to buy or sell the shares of the investments mentioned. Investments and income arising from them can fall as well as rise in value. Past performance and forecasts are not reliable indicators of future results and performance. The information and views were correct at time of publishing but may have changed at point of reading.