Listen Now
Gold prices have been surging lately, up almost 10% year-to-date and trading near all-time highs at just shy of $3,000 per Troy ounce. This follows a notable 25.3% increase last year, surpassing the S&P 500’s total return.
But why exactly are gold prices climbing, and should investors consider buying gold now?
Sign up for my newsletter so you can easily reply to my emails with your thoughts or questions for the podcast:
Why Are Gold Prices Rising? (2025 Market Update)
Central banks are key contributors to the gold price surge. Following the freezing of Russian central bank assets in response to Russia’s invasion of Ukraine in 2022, global central banks have significantly ramped up gold purchases, with annual increases averaging 11.5% since 2019. These central banks are buying gold primarily to diversify reserves and protect themselves against geopolitical risks and currency instability.
Another common narrative supporting gold’s recent run is the changing investor sentiment driven by heightened inflation expectations and expansive monetary and fiscal policies. As interest rates peak and the attractiveness of bonds and cash diminishes, investors increasingly view gold as a perceived safe-haven asset.
But before jumping into gold, investors should carefully evaluate these claims.
Does Gold Truly Diversify Your Investment Portfolio?
There are generally two reasons to evaluate whether you should invest in gold to add a new exposure to your portfolio:
- Enhance returns, or
- Improve diversification.
The case for gold enhancing returns is non-existent. Because gold has no earnings or income, it’s impossible to generate a reasonable expected rate of return to use for building an asset allocation.
As a result, the case you hear for including gold in a portfolio is typically going to be about improving diversification. After all, its price movements differ significantly from stocks and bonds, meaning it has a low correlation (in finance speak) with traditional investments.
While low correlation might suggest diversification potential, correlation alone doesn’t justify gold’s inclusion in your investment portfolio. Volatility still matters, so if a low correlation asset is highly volatile, it could introduce more risk to the portfolio rather than reduce it. The issue of viewing gold as a diversifier in this context is worsened by the fact that (as we’ve already established) it has no expected rate of return.
Is Gold Really an Effective Hedge Against Inflation?
Gold is often touted as an effective inflation hedge, but historical data tells a different story. Since gold futures began trading in 1975, gold prices have frequently risen in anticipation of higher inflation, only to deliver disappointing real (inflation-adjusted) returns once inflation arrives or fails to materialize.
Today’s gold prices have surpassed previous real price peaks of January 1980 and August 2011. Historically, these peaks were followed by extended periods of poor performance. Gold fell approximately 28% over the subsequent five years following the most recent 2011 peak. And after the 1980 peak, gold experienced decades of negative real returns.
Furthermore, gold’s volatility undermines its reliability as an inflation hedge. From 1970 to 2024, gold’s price volatility (standard deviation) was approximately 18.9%, compared to just 1.3% for inflation. Such a significant mismatch in volatility makes gold ineffective as a stable inflation hedge.
Simply put, despite popular belief, gold is not an effective inflation hedge.
Betting Against the U.S. Dollar: Is Gold the Right Choice?
Investors sometimes turn to gold out of fear of currency collapse, particularly concerning the U.S. dollar losing its status as the global reserve currency. But in reality, there currently isn’t a realistic substitute for the U.S. dollar.
Listen to my previous episode ‘Why The US Dollar Rules The World: A Deep Dive Into Reserve Currencies‘ to learn more.
The Chinese yuan, for example, represents a tiny fraction of global settlements and lacks the financial infrastructure necessary to replace the dollar. The Japanese yen and euro also fall short for various structural reasons.
Moreover, even the substantial gold reserves held by the U.S. government, famously stored at Fort Knox, are largely symbolic. These reserves remain primarily due to historical legacy rather than strategic necessity, highlighting gold’s limited practical utility.
Behavioral Risks of Investing in Gold
Finally, investing in gold frequently appeals to those concerned about catastrophic market crashes or systemic failures. However, investing based on fear of rare catastrophic events essentially equates to market timing—a strategy historically proven to be ineffective.
In today’s financial environment, where cash yields are notably higher, gold’s inherent lack of yield means investors face substantial opportunity costs by holding gold.
We know market timing is bad, so there is a fundamental problem with this argument (even if your hypothetical catastrophic event isn’t completely outlandish).
We never know when or why the next correction or bear market will happen.
What we do know is that market downturns happen on a regular basis. Rather than trying to predict the timing or cause of the next crisis, you’re better off planning on downturns occurring with a similar magnitude and frequency as they have in the past.
Investors must be willing to lose money on occasion – sometimes a lot of money – to earn the average long-term return that attracts most people to stocks in the first place. Volatility isn’t the enemy; it’s the cost of higher expected returns you earn in stocks versus bonds or cash.
Final Thoughts: Should You Invest in Gold?
Ultimately, the reason we invest is to outpace inflation without taking undue risk.
Rather than chasing trends or emotionally driven investments, you’re better served by understanding clearly what you own, why you own it, and how it aligns with your long-term financial goals.
If you have a thoughtful financial plan and portfolio in place, it probably addresses the concerns that cause you to consider gold in the first place.
Resources:
- Listen to EP 157: Why The US Dollar Rules The World: A Deep Dive Into Reserve Currencies
- Big financial decisions ahead? Take my 15-question Financial Assessment
The Long Term Investor audio is edited by the team at The Podcast Consultant
Submit Your Question For the Podcast
Do you have a financial or investing question you want answered? Submit your question through the “Ask Me Anything” form at the bottom of my podcast page.
Support the Show
Thank you for being a listener to The Long Term Investor Podcast. If you’d like to help spread the word and help other listeners find the show, please click here to leave a review.
I read every single one and appreciate you taking the time to let me know what you think.
Free Financial Assessment
Do you want to make smart decisions with your money? Discover your biggest opportunities in just a few questions with my Financial Wellness Assessment.
