Debunking 5 Gold Misconceptions

  • Gold has the potential to play a diversifying role in a portfolio because it historically has not correlated strongly with other major asset classes.
  • Including a gold allocation within a balanced portfolio may reduce its overall volatility and improve risk-adjusted returns.
  • Gold has a long track record of at times holding its value or rising when other assets are falling.

George Milling-Stanley
Chief Gold Strategist, State Street Global Advisors
Howard Wen
Senior Gold Strategist, SPDR ETFs
Diego Andrade
Gold Strategist, SPDR ETFs

Gold attracted investor interest throughout 2018. This interest isn’t surprising — investors tend to flock to gold when uncertainty is heightened and when equity returns may be overstretched.

As we have highlighted in a number of earlier blogs, gold may be able to perform several roles within a balanced investment portfolio, including:

  1. Acting as a diversifier: Gold has the potential to play a diversifying role in a portfolio because it historically has not correlated strongly with other major asset classes held in a typical portfolio.1
  2. Reducing total portfolio risk: Including a gold allocation within a balanced portfolio may reduce its overall volatility and improve risk-adjusted returns because gold has relatively low historical correlation to many major asset classes. This may help persify a portfolio.2 For investors who are already comfortable with a given level of risk, adding a small gold allocation may allow them to move further out along the risk spectrum in some of their other investments, and that may also improve risk-adjusted returns.
  3. Potential hedge against unexpected events: Gold has a long track record of at times holding its value or rising when other assets are falling in a differentiated manner.3

The potential for lower portfolio volatility with an allocation to gold is not the only reason to own gold. There are a number of outdated notions holding back investors from making a long-term allocation to gold. To tackle this issue, we’ve put together a list of what we perceive to be five common misconceptions about gold and what we believe to be the reality behind these common misunderstandings.

Misconception 1: Gold’s Only Function is as an Inflation Hedge

Fact: Although gold has historically tended to perform well during periods of high and sustained inflation, its sole purpose as an inflation hedge has not always been the case.

The blue periods in Figure 1 highlight times in the early 1990s and 2000s when gold prices did not surge even though the inflation risk premium (the additional yield investors require to protect against inflation), did increase. In other words, gold may play an important role in portfolios, but there are other drivers to its return than just an increase in prices.


Inflation Risk Premium & Price of Gold


Gold does not always move with inflation. Periods shaded in the chart show times when gold and the inflation risk premium (the additional yield investors require to cover inflation) decoupled.

Misconception 2: Gold does not Pay any Interest or Produce any Income, so it has no Value

Fact: There are many reasons to buy gold beyond its potential value as an investment. For instance, many people purchase gold for cultural and religious purposes. Jewelry represents the largest source of annual demand for gold, accounting for more than 48 percent of demand for the precious metal in 2017.

Within gold jewelry consumption, China and India typically purchase over half of the world’s gold jewelry, and while demand fell in both countries last year, their historical affinity for gold remains strong.4

So, while investment demand is important for setting the price of gold, it is actually a small portion of overall demand. This highlights how gold demand is different than traditional assets and does not respond to business cycle changes in the same way as many other commodities.

Misconception 3: Buying or Selling by Central Banks is the Primary Driver of Gold Prices

Fact: While central bank purchases and sales are an important factor in gold prices, central bank activity rarely affects more than 10% of each year’s demand or supply (Figure 2). From 1989 to 2009, central bankers were net-sellers to the private sector of about 10% of the annual gold supply. Since 2010, central banks have been net-purchasers of about 10% of annual demand. Meanwhile jewelry regularly accounts for around 50% or more of end-user demand, and the use of gold in industrial and technological applications accounts for up to another 10%. Investment demand has historically ranged from roughly 10% to 30% annually.


Gold Demand by Source
Investment and financial markets are not the only source of demand for gold. Jewelry alone accounts for some 48% of world gold demand, and over 10 times the current demand for gold by ETFs and similar products.

Misconception 4: Gold does not Deserve an Allocation in a Portfolio Because it is Volatile

Fact: Gold actually ranks around the midrange in terms of volatility when the precious metal’s price is compared with various stock and bond indices* (See Figure 3). Moreover, if one considers that indices tend to be less volatile than their individual stock or bond components, gold’s potential volatility may be less of a concern. In other words, claiming that gold might be overly volatile relative to other investments is likely to be misguided.

* Indices representing gold, stocks and bonds in the above comparison are as follows:
Gold = LBMA Gold Price PM (USD/oz); Equities = MSCI EAFE Index, MSCI Emerging Markets Index; Bonds = Bloomberg Barclays US Treasury Index, Bloomberg Barclays US
Corporate High Yield Index, Bloomberg Barclays Global Treasury Ex-US Index.


Misconception 5: A Tightening Cycle Leads to Negative Gold Prices

Fact: Gold does not necessarily follow expectations. The traditional view is that when the Fed starts raising rates the economy is growing well and countering inflation is starting to be a concern. Interest rates and inflation are often linked together due to their impact on real rates, which has historically affected gold prices. There may be short-term noise, but interest rate hikes are not necessarily negative for gold. The ten interest rate tightening cycles we analyzed since 1971, when gold effectively became free-floating, had resulted in an average increase of 37% in the price of gold5. In line with prior tightening cycles, gold is currently up 18% (as of June 30, 2018) from the price level we saw in December 17, 2015 when the current interest rate tightening cycle just began.

The Takeaway for Investors

Today’s uncertain market environment may be the ideal time for investors to rethink any of these common misconceptions about gold and the potential role gold can play in an investment portfolio.


1 Since 2000, the correlation of gold to stocks, bonds and other commodities was 0.01, 0.28, and 0.44, respectively. Source: SSGA, Bloomberg, as of 06/30/2018. Computed using monthly return data from January 2000 to June 2018. Correlation measures the degree to which the deviations of one variable from its mean are related to those of a different variable from its respective mean. Stocks represented by S&P 500 Index; Bonds represented by the Bloomberg Barclays US Aggregate Index; Commodities represented by Bloomberg Commodity Index. Index returns reflect all items of income, gain and loss and the reinvestment of dividends and other income.
2 World Gold Council, An Investors Guide to the Gold Market US Edition, December 2010. As quoted in SSGA. The Case for Gold: A Strategic Asset.
3 FactSet, SSGA, from 12/31/1989 to 12/31/2013.
4 World Gold Council, “Gold Demand Trends Full Year 2017,” published 02/06/2018.
5 Source: Bloomberg Financial L.P. & State Street Global Advisors, as of June 30, 2018.
6 Source: Bloomberg Financial L.P. & State Street Global Advisors, as of June 30, 2018.



Bloomberg Barclays Global Treasury ex-US Index: A benchmark designed to track the fixed-rate local currency sovereign debt issued by investment-grade countries outside the US. Bonds must have a remaining maturity of one year or more.
Bloomberg Barclays U.S. Corporate High Yield Bond Index: The index covers the universe of fixed rate, non-investment grade debt. Eurobonds and debt issues from countries designated as emerging markets (sovereign rating of Baa1/BBB+/BBB+ and below using the middle of Moody’s, S&P, and Fitch) are excluded, but Canadian and global bonds (SEC registered) of issuers in non-EMG countries are included. The index includes both corporate and non-corporate sectors.
Bloomberg Barclays US Aggregate Bond Index: A benchmark that provides a measure of the performance of the US dollar denominated investment grade bond market, which includes investment grade government bonds, investment grade corporate bonds, mortgage pass through securities, commercial mortgage backed securities and asset backed securities that are publicly for sale in the US.
Bloomberg Barclays US Treasury Index: US dollar-denominated, fixed-rate, nominal debt issued by the US Treasury. Treasury bills are excluded by the maturity constraint, but are part of a separate Short Treasury Index.
Bloomberg Commodity Index: A broadly diversified commodity price index distributed by Bloomberg Indexes that tracks 22 commodity futures and seven sectors. No one commodity can compose less than 2 percent or more than 15 percent of the index, and no sector can represent more than 33 percent of the index.
Consumer Prices (CPI) Consumer Prices (CPI): are a measure of prices paid by consumers for a market basket of consumer goods and services. The yearly (or monthly) growth rates represent the inflation rate.
Dow Jones US Select REIT Index: A benchmark of US REITs and REIT-like securities that screens for market capitalization, liquidity and percentage of revenue derived from ownership and operation of real estate securities. It is float market cap weighted and quoted in dollars.
LBMA Gold Price: The LBMA Gold Price is determined twice each business day (10:30 a.m. and 3:00 p.m. London time) by the participants in a physically settled, electronic and tradable auction administered by the ICE Benchmark Administration Ltd (IBA) using a bidding process that determines the price of gold by matching buy and sell orders submitted by the participants for the applicable auction time.
MSCI EAFE Index: An equities benchmark that captures large- and mid-cap representation across developed market countries around the world, excluding the US and Canada.
MSCI Emerging Markets Index: The MSCI Emerging Markets Index captures large and mid-cap representation across 23 emerging markets countries. With 834 constituents, the index covers approximately 85% of the free float-adjusted market capitalization in each country.
Standard Deviation: Measures the historical dispersion of a security, fund or index around an average. Investors use standard deviation to measure expected risk or volatility, and a higher standard deviation means the security has tended to show higher volatility or price swings in the past.

Important Information

Commodities and commodity-index linked securities may be affected by changes in overall market movements, changes in interest rates, and other factors such as weather, disease, embargoes, or political and regulatory developments, as well as trading activity of speculators and arbitrageurs in the underlying commodities. Currency exchange rates between the U.S. dollar and non-U.S. currencies may fluctuate significantly over short periods of time and may cause the value of investments to decline. Frequent trading of ETFs could significantly increase commissions and other costs such that they may offset any savings from low fees or costs. Diversification does not ensure a profit or guarantee against loss. Investing in commodities entails significant risk and is not appropriate for all investors. There can be no assurance that a liquid market will be maintained for ETF shares. The World Gold Council name and logo are a registered trademark and used with the permission of the World Gold Council pursuant to a license agreement. The World Gold Council is not responsible for the content of, and is not liable for the use of or reliance on, this material.