1. A Strong Case for Re-evaluation
Gold has long been considered a store of value and a hedge in turbulent times. Yet in most institutional and private wealth portfolios, it still plays only a minor role. Allocations above five percent remain rare. This is surprising, given both the long-term performance characteristics of gold and its recent behavior in a volatile macro environment.
In 2022, traditional portfolios faced broad-based losses. Equities and bonds posted double-digit declines in many markets, undermining the traditional diversification effect of a 60/40 portfolio. Gold, by contrast, proved remarkably resilient. While it recorded a modest decline in US dollar terms, it delivered flat to slightly positive returns in euro and Swiss franc terms. Once again, gold demonstrated its value as a stabilizer in multi-asset portfolios.
This article outlines the fundamental drivers of gold, argues why the long-term case remains intact, and examines gold's specific role in USD, EUR- and CHF-based portfolios.
Gold is not merely a hedge, but a strategic asset class with unique diversification benefits.
Structural macroeconomic shifts such as high debt levels, low real interest rates, and geopolitical fragmentation support its long-term case.
Historical data (1990–2025) show that gold improved returns, reduced volatility, and lowered drawdowns across CHF, EUR, and USD portfolios.
Optimal allocation: The amount depends on reference currency, risk profile, and investment objective. In all cases, there is a clear benefit to including gold in the portfolio.
In light of weakening diversification effects from bonds, gold should be viewed as a core portfolio component not a peripheral hedge.
2. Structural Drivers Supporting Gold
Gold's long-term behavior is shaped by macroeconomic fundamentals, not merely by market sentiment. In the current global environment, several powerful forces converge to create a favorable backdrop for gold. These include the growing dominance of fiscal policy, structurally low real interest rates, persistent inflation risks, renewed central bank demand, supply-side constraints, and intensifying geopolitical fragmentation. These drivers are not cyclical. They represent lasting shifts that support a strategic role for gold in diversified portfolios.
2.1 Fiscal Expansion and Real Interest Rates
Over the past two decades, public debt has risen sharply across advanced economies. Initially driven by the global financial crisis and later by the COVID-19 pandemic, fiscal deficits have become more entrenched. Long-term structural spending pressures ranging from demographics to defense and climate policy suggest that debt ratios will remain elevated for the foreseeable future.
At the same time, central banks face limits in their ability to raise interest rates without triggering financial instability. The result is a policy environment in which nominal rates may appear high, but real interest rates remain low or even negative over long periods. This is not a temporary aberration but a deliberate policy choice in the context of high debt levels and financial repression. As public debt ratios rise, the risk increases that central banks will come under political pressure to prioritize debt sustainability over price stability. The line between monetary and fiscal policy becomes blurred, with growing incentives to keep nominal interest rates artificially low and finance public deficits directly or indirectly through money creation. The current situation in the United States offers a preview of this dynamic. High debt levels are threatening to erode the practical independence of the central bank.
Gold has historically performed well in such settings. As a non-yielding asset, it becomes relatively more attractive when real returns on bonds and cash are low. In the 1970s, in the years following the global financial crisis, and again in the post-pandemic period, gold has appreciated significantly during prolonged episodes of negative real rates. This relationship remains a central part of the long-term investment case.
Unlike government bonds, gold is not a financial claim and does not carry credit or counterparty risk. Because it is not a liability of any state or institution, it is structurally exempt from financial repression measures such as interest rate caps, mandatory bond holdings, or negative real yields that aim to transfer resources from the private to the public sector. Gold cannot be inflated away, defaulted on, or politically targeted in the same way as sovereign debt. This makes it uniquely resilient in a policy environment where inflation risks and public debt burdens persist. Moreover, when held in physical form, gold is harder to confiscate than conventional financial assets, providing an additional layer of protection in extreme or politically unstable scenarios.
2.2 Inflation Risk and Monetary Credibility
Inflation is a recurring feature of economic systems and not a temporary anomaly. While its pace and causes vary across time, structural drivers such as tight labor markets, shifting demographics, and geopolitical fragmentation continue to exert upward pressure on prices. Periods of price stability can quickly give way to inflation volatility, especially when confidence in monetary policy weakens or global production networks are disrupted.
Gold plays a strategic role in this context. Unlike nominal assets, it is not dependent on the solvency of governments or the credibility of central banks. While it offers no yield, it offers resilience, preserving value when inflation surprises to the upside or when trust in monetary institutions deteriorates.
This has been demonstrated across multiple historical episodes:
The 1970s: A decade marked by oil shocks, wage-price spirals, and loss of central bank credibility. Gold rose from roughly $35 per ounce at the start of the decade to over $600 by 1980, preserving real wealth during a prolonged period of stagflation.
The Global Financial Crisis (2008–2011): As trust in financial institutions waned and central banks expanded their balance sheets, gold outperformed traditional assets, rising from under $800 to over $1,800 per ounce.
The COVID-19 shock (2020): In the face of extreme monetary and fiscal stimulus, gold again acted as a store of value, reaching new highs above $2,000 as investors questioned the long-term implications of massive global liquidity injections.
More recently, episodes of geopolitical instability, such as the war in Ukraine, have reinforced gold's role as a hedge in uncertain environments where inflation and financial market volatility can reappear quickly and unpredictably.
Gold is not a precise hedge against short-term changes in consumer price inflation, but rather a long-duration hedge against monetary regime shifts, when inflation becomes more volatile, and the credibility of fiat-based systems comes into question.
For long-term investors, these properties make gold a strategic portfolio component, offering diversification, capital pre-servation, and resilience when other assets are most vulnerable. Unlike in the past, when gold had an officially fixed price under the gold standard, today's monetary system allows gold to float freely. As long as the world does not return to a gold-backed currency regime, which is unlikely, central banks retain the policy flexibility needed for managing modern economic complexity. This reinforces gold's role as a market-driven, policy-independent store of value.
2.3 Central Bank Demand and Reserve Diversification
Another important shift in the gold market is the changing nature of central bank demand. Since 2010, emerging market central banks have been net buyers of gold, with the pace of accumulation accelerating in recent years. This trend was further reinforced in 2022 after the freezing of Russian FX reserves by Western governments. Gold has re-emerged as a politically neutral reserve asset that is immune to sanctions and independent of any single monetary jurisdiction.
China, India, Turkey, and other central banks have steadily increased their gold holdings as part of a broader de-dollarization strategy. These purchases are strategic and long-term in nature. They are not driven by short-term speculative motives, but by a desire to diversify away from US Treasuries and other reserve assets that carry credit, currency, or political risk.
This demand shift has two important implications. First, it introduces a more stable, price-insensitive source of demand into the gold market. Second, it reflects a broader change in the international monetary order. As confidence in the US dollar-centric system wanes, gold is regaining importance as a foundational reserve asset, particularly for countries outside the traditional Western bloc (but not only).
2.4 Supply Constraints
While demand is structurally rising, gold supply remains constrained. Global mine production has been broadly flat for the past decade. In 2024, global gold mine output reached approximately 3,661 tonnes, only marginally above the previous record of around 3,656 tonnes set in 2018. This suggests that production has effectively plateaued since at least 2018, prompting renewed discussions around potential "peak gold" dynamics.
Significant new discoveries have become increasingly rare. Between 1990 and 2023, 350 deposits were identified globally, containing a total of roughly 90,200 tonnes of gold. Since 2020, however, only five major discoveries have been reported, with a combined volume of just 530 tonnes—well below the average annual discovery rate during the preceding decade.
Capital expenditure in the gold mining sector remains subdued, reflecting years of underinvestment and an increasing focus on ESG compliance. Consequently, even in the event of further price increases, the supply pipeline is unlikely to respond quickly.
Unlike financial assets, gold cannot be created at will. Its supply is physical, slow-moving, and tightly regulated. In a world of abundant money and rising geopolitical risk, the scarcity of gold enhances its strategic appeal. Structural supply constraints also reduce the likelihood of large drawdowns triggered by overproduction or leverage-driven excesses.
2.5 Geopolitical Tensions
Finally, the geopolitical context reinforces gold's strategic appeal. The global order is becoming more multipolar, with rising tensions between major powers. The economic and financial tools of the West—including the SWIFT system, sovereign debt markets, and financial regulation—are increasingly used as instruments of foreign policy and therefore becoming more political. For countries at the margins or outside of Western alliances, the incentive to reduce exposure to politically vulnerable assets is growing.
In this environment, gold provides an alternative that is universally recognized, legally robust, and free from political entanglements. It is one of the few financial assets that does not depend on the solvency or goodwill of any government. For investors, this also means that gold can act as a hedge against tail risks that are difficult to quantify or model, such as sanctions, currency freezes, or geopolitical conflict.
2.6 Monetary Inflation and Surplus Liquidity
While gold responds to interest rates, inflation expectations, and geopolitical stress, its long-term trend is also shaped by the evolution of the money supply. Traditional inflation metrics, such as CPI, capture only part of the picture. Over time, monetary inflation, defined as the expansion of the effective money supply, including liquid instruments like Treasury Bills, has proven to be a key driver of gold prices.
One useful framework compares the growth in money supply to the real potential output of the US economy. When money supply growth consistently exceeds real output growth, it creates surplus liquidity, a structural force that tends to fuel asset price inflation, including gold. In this context, gold acts as a long-term hedge not just against consumer price inflation, but against monetary dilution itself.
This approach highlights the disconnect between nominal GDP growth and balance sheet expansion across central banks. Alternatively, broader global money aggregates can also be used to estimate liquidity effects, even though they often exclude money-like assets (such as repos or shadow banking instruments).
Gold's sensitivity to monetary excess is not always visible in the short term, but over longer cycles it has shown a strong correlation with unanchored liquidity growth, particularly during episodes of aggressive monetary accommodation and quantitative easing.
3. Gold as a Strategic Asset: Quantifying Its Role in Multi-Asset Portfolios
Gold has proven to be a resilient and strategic portfolio component across different monetary regimes, geographies, and base currencies. However, its role and effectiveness as a diversifier vary depending on the investor's home currency. In the following, we examine the long-term case for gold in CHF, EUR, and USD portfolios based on more than three decades of data and quantify how much gold would have improved portfolio efficiency over this horizon.
3.1 Methodology: Portfolio Construction and Optimization
The optimization results presented in this paper are based on two starting allocations: a balanced portfolio with 50% equities and 50% global, FX-hedged bonds, and a growth portfolio with 83% equities and 17% bonds. From these starting points, gold is introduced in 2% increments, reducing both equities and bonds proportionally. For example, a 10% gold allocation in the balanced portfolio results in 45% equities and 45% bonds; at 40% gold, the remaining allocation is 30% equities and 30% bonds.
Each gold allocation is evaluated across three distinct optimization objectives:
Maximum Sharpe Ratio: highest risk-adjusted return over the period
Minimum Volatility: lowest standard deviation of returns
Maximum Return: highest compound annual return, regardless of risk
All optimizations are based on pre-tax returns. Tax treatment is not considered in this analysis, but as discussed in Section 2.1, gold's lack of taxable income would likely make it even more attractive on an after-tax basis.
3.2 How Much Gold is Optimal
Across all currencies and risk profiles, gold allocations well above the symbolic 5% significantly improved long-term portfolio characteristics. Depending on the objective, allocations between 20% and 40% were optimal.
The table below summarizes the gold allocation that would have maximized each objective.
The following table quantifies the impact on key performance metrics across currencies.
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Key Takeaways by Currency:
CHF portfolios:
The strong result is surprising, given Switzerland's monetary strength
Highlights that gold's benefit does not rely on inflation or currency weakness
Gold adds value through independence from credit, politics, and central banks
EUR portfolios:
High benefit reflects monetary regime risk in the euro area
Gold served as a hedge against euro fragmentation and unconventional ECB policy
Results confirm its role as a strategic reserve asset, not just a tactical hedge
USD portfolios:
Slightly lower benefit reflects stronger domestic equity and bond returns
Nonetheless, gold improved outcomes during major stress periods (e.g., 2008, 2020)
Optimal allocations remained material
3.3 Diversification Benefits
The diversification benefits of gold are robust across currencies, risk profiles, and portfolio objectives. Its structural low correlation with equities and bonds, combined with its tendency to perform during episodes of financial stress or when equities and bonds post negative returns simultaneously, makes gold a uniquely effective portfolio stabilizer.
This was clearly illustrated in 2022, when equities and bonds sold off in parallel. In contrast, gold preserved value in all three currencies, thereby cushioning multi-asset portfolios from more severe losses.
Our analysis confirms that:
Gold reduces drawdowns: Portfolios with material gold allocations experienced significantly smaller peak-to-trough losses during major crisis periods (without giving up materially on return).
Sharpe ratios improve: Across CHF, EUR, and USD portfolios, the inclusion of gold could raise the Sharpe ratio by 20 – 25%, depending on currency and portfolio type.
The diversification benefit transcends currency regimes: Even in stable monetary systems like Switzerland's, gold added significant portfolio value.
Importantly, the impact is evident across both balanced and growth-oriented strategies. The improvement in portfolio quality, whether measured through return, volatility, or drawdown metrics, is too significant to ignore. Gold is not simply a hedge against inflation or currency weakness; it is a structurally diversifying asset with persistent global relevance.
While the optimization methodology is robust, it is important to acknowledge certain limitations: the results rely on historical return, volatility, and correlation estimates, which are subject to estimation risk. In addition, very high gold allocations, although optimal in-sample, may face institutional constraints or liquidity considerations in practice.
4. Conclusion
The strategic case for gold is stronger than commonly acknowledged. A series of long-term structural drives including high government debt levels, inflation uncertainty, rising geopolitical fragmentation, and the gradual reshaping of the international monetary system continue to support demand for gold as a real asset. At the same time, supply is constrained, and institutional and private allocations remain modest, often well below 5%.
The results also reveal a deeper strategic insight: gold can act as a partial substitute for traditional low-risk assets such as global bonds. In the optimization framework, portfolios with 30–40% gold allocations still maintained acceptable risk profiles with significantly reduced bond exposure. This reflects gold's ability to contribute to portfolio stability through low correlation and crisis performance—without relying on income or issuer solvency. In a world where the diversification role of government bonds is increasingly questioned, this property enhances gold's appeal as a core asset rather than a peripheral hedge.
Our empirical findings (period 1990 to 2025) show that:
Gold has delivered strong absolute and relative returns across CHF, EUR, and USD portfolios.
The optimal allocation varies depending on reference currency, risk profile, and investment objective. In most scenarios, there is a clear benefit to including gold in the portfolio.
The impact on drawdowns and risk-adjusted returns is substantial, particularly over longer investment horizons.
These results are not driven by short-term tactical dynamics. They reflect gold's structural properties: low correlation, asymmetric performance in crises, and independence from monetary and credit systems. Gold's lack of cash flow also explains why it remains underappreciated by many in the financial industry. Traditional valuation tools such as discounted cash flow or earnings-based models simply do not apply. This analytical mismatch contributes to its marginalization in investment frameworks and explains why some economists still regard it as a "barbarous relic" of the pre-modern era. Yet this very absence of cash flow is what makes gold structurally independent of economic cycles, issuer solvency, and monetary cre-dibility. In a world where most assets are financial claims, gold's lack of dependency is precisely its value.
Yet despite this profile, gold remains underrepresented in many portfolios. This is not due to lack of evidence, but due to the way gold is framed: as a hedge, an insurance policy, or a last-resort asset. Such a framing naturally limits allocations. Investors hesitate to "overweight" something seen as defensive, even when the data suggest that larger strategic allocations would improve portfolio quality.
This perception is outdated. Gold should no longer be viewed solely as a hedge or a speculative commodity. It is better understood as a strategic asset class in its own right alongside equities, bonds, real estate, and other alternative asset classes. Its role is not to replace traditional assets, but to complement them with a fundamentally different return and risk profile.
In a world where the traditional diversification role of bonds is increasingly in question, gold offers rare and enduring benefits: uncorrelated returns, asymmetric protection, and robust performance across currencies and monetary regimes.
The prevailing practice of limiting gold exposure to 5% or less is increasingly difficult to justify. Gold is not just an insurance policy for extreme scenarios. It is a foundational building block for modern strategic asset allocation and not a relic from the past.
Autor:
Frank Häusler
Disclaimer
The information contained in this article is for informational and promotional purposes only and refers exclusively to historical data and past market conditions. It does not constitute investment advice, a recommendation or an invitation to buy, sell or subscribe to financial products, in particular gold or other precious metals. Despite careful research and review, we do not guarantee the completeness, accuracy or timeliness of the content. Investments in precious metals are also subject to fluctuations and may result in losses. In particular, past and current gold prices do not allow any conclusions to be drawn about future price developments. The individual circumstances and investment objectives of the recipients of this article are not taken into account. We therefore recommend that you seek personal advice before making any investment decision, including legal or tax advice where necessary.