Comparing gold to other alternative investments
While many investors classify gold as a traditional commodity or currency, gold stands out from other hard assets and fiat currencies due to its diverse sources of demand across a full economic cycle. This supports viewing gold as an independent alternative asset class that warrants a distinct allocation in investment portfolios.
Related ETFs
As portfolio construction evolves beyond the traditional “balanced” 60/40 stock and bond mix, investors are increasingly looking to add less traditional assets that can potentially add diversification as well as uncorrelated returns.
Gold’s low correlations are a plus for portfolios
From 1982 to 2022, financial markets experienced an environment largely categorized by falling interest rates, a peacetime dividend between the world’s militarized superpowers, and globalization. Whether due to the pandemic, populist politics, or the current inflationary environment, a lot of that has shifted. As a result, what worked under the previous four-decade period—the traditional 60/40 portfolio—may be far less likely to work going forward
Turning to today’s market, while US stock/bond correlations weakened a bit in 3Q, they are still around 27-year highs (Figure 1).1 The positive US stock/bond relationship since the inflation spike of 2021-2022 enhances the case for adding alternative investments.
And based on gold’s historically low correlation with many traditional asset classes,2 a strategic allocation to gold may help to improve portfolio construction strategies for a wide range of portfolio risk profiles across a variety of full market cycles.
How to compare gold with other asset classes
To assess gold’s diversification potential, investors should consider the unique diversity of gold’s demand.
Unlike other commodities, liquid alternatives, and currencies, gold’s demand is relatively price inelastic and spans four distinct sectors: jewelry, industrial use, investments, and central bank reserves (Figure 2). Each sector is driven by different economic and behavioral factors, creating a dynamic interplay that supports both cyclical and counter-cyclical consumption. This broad and diverse demand base has been a key source of gold’s low historical correlation, distinguishing it from traditional financial assets.
For example, from November 2020 to May 2024, gold ETF stockholders provided net supply for world gold consumers to the tune of 180-200 tonnes, on average, per year.3 During those 43 months, gold appreciated by almost 25% due to stronger than anticipated demand from the APAC region (led by Chinese consumer via jewelry and physical bars/coins) and central banks.4
The official sector is critical in supporting gold demand. The growth in central bank buying since 2022, even as gold prices rose substantially, illustrates that bullion demand from reserve managers is driven more by strategic considerations than price sensitivity. This unique form of price inelasticity differentiates central bank demand from other gold market segments, especially jewelry, and helps explain gold’s strong price performance in recent years.
Figure 2: Gold’s dual nature
| Average annual Gold demand (%) | Driver | |
|---|---|---|
| Jewelry | 50 | Cyclical |
| Industrial | 8 | Cyclical |
| Investment | 28 | Counter-cyclical |
| Central banks | 15 | Both |
Source: State Street Investment Management, World Gold Council. Average gold demand based on full annual data for the 10-calendar year period from December 31, 2014 to December 31, 2024. Past performance is not a reliable indicator of future performance.
Broad commodities are no substitute for pure gold
Investors commonly access commodities as an asset class by investing in broad commodity indices and passive strategies. But this approach should not be viewed as a substitute for an independent allocation to gold.
In fact, based on several prominent broad commodity indices, the gold allocation within a commodity benchmark can range from 4% to 14%.5 This can leave a portfolio underexposed to gold and some of its beneficial investment characteristics. Practically speaking, gaining gold exposure via a broad commodity index may offer investors access to some of gold’s diversifying and inflation-fighting benefits. But the relatively low exposure to gold may leave other potential benefits untapped—especially since commodity indexes are usually driven by energy weightings and tilted toward pro-cyclical environments. Additionally, when we compare gold with major broad commodity indexes, we see that historically, gold has outperformed with reduced downside.
Major commodities such as oil, copper, and even silver have historically been more cyclical than gold and have tended to have a higher correlation to risky asset markets and economic cycles (Figure 3). That’s because their demand depends more on pro-cyclical consumption, meaning they may capture both more of the upside movements in global equities and growth and more of the downside when equities and growth fall.
Liquid alternatives deliver less diversification
When discussing gold’s diversification benefits, the conversation often turns to other “liquid alternatives” that are frequently leveraged for their daily liquidity and low correlations to stocks and bonds. But broadly speaking, gold has historically maintained a lower static correlation over time and has provided a more efficient source of diversification than many of those other assets, including REITs; liquid hedge fund strategies such as long/short equity strategies and a broad asset-weighted benchmark; and global listed private equity companies (Figure 4).
Since 2008, gold’s correlation to the global 60/40 portfolio has trended lower, while other alternative asset classes have experienced an increase in their correlation to global 60/40 portfolios, potentially reducing the diversification benefits they provide to investors’ portfolios.
Bitcoin has just one source of demand
FX exposure is another way that investors can manage volatility and inflation. With the evolution of technology, investors now have so-called digital currencies, such as bitcoin, to consider as an alternative for gold. But in our view, bitcoin is not gold since it only has one source of demand: investment demand.
Additionally, bitcoin’s extremely limited track record, elevated volatility, and speculative nature have yet to demonstrate that it can effectively transfer and preserve wealth over time like gold.6 Lastly, most central banks and other institutions still do not accept cryptocurrencies—such as bitcoin—as a medium of exchange, further diminishing some of those benefits relative to gold.
On a diversification and risk-adjusted return basis—especially during market downturns—bitcoin historically is not comparable to gold (Figure 5).
Gold: A distinct and independent asset class
While innovation in the market is inevitable and welcomed, our stance is that both history and data prove gold’s historical store of value and the virtues of its diversification and liquidity profile—especially when compared with commodities, liquid alternatives, and cryptocurrencies, such as bitcoin.
As risks evolve in today’s challenging market, gold continues to redefine its role in modern portfolios—extending its reach beyond its traditional use as a “safe haven” to serve as a more reliable and versatile portfolio diversifier than other commodities, liquid alternative, currencies, and even fixed income assets. As investors seek resilient strategies to manage risk and enhance portfolio growth, gold’s relevance and utility continue to shine.