By Oliver Taylor and Joven Lee, multi-asset experts at Schroders

Falling real yields, currency movements, and geopolitical risks are expected to continue influencing gold prices. Although the metal has not consistently served as a reliable hedge during recent market downturns, it continues to offer meaningful diversification benefits in multi-asset portfolios via its low correlation with traditional assets and its potential to modestly enhance long-term returns.

In this brief paper, we will not delve into the characteristics and macro drivers of gold but instead focus on its effectiveness in hedging geopolitical and inflationary risk, and a refresher on whether it makes sense to have a structural allocation in diversified multi-asset portfolios.

Gold is a less politically-exposed diversifier

In an increasingly fragmented geopolitical landscape, gold stands out as a uniquely resilient asset. Unlike government bonds, which are inherently tied to the political and credit risks of their issuing sovereigns, gold is a non-sovereign store of value. This independence makes it particularly attractive to official institutions and investors seeking diversification in a multipolar world.

Government bonds, such as US Treasuries, are typically held in custody within their issuing jurisdictions - for example, through the Fedwire system in the US. This arrangement exposes overseas holders to the political discretion of the issuing country, however limited that influence may be. As recent history has shown, geopolitical tensions can lead to asset freezes and sanctions, undermining the perceived safety of sovereign debt holdings.

Gold, by contrast, is free from such counterparty risks. It is not subject to the political will of any single nation and cannot be frozen or sanctioned in the same way as fiat-denominated assets. This neutrality is increasingly valuable amid de-dollarisation, shifts in reserve currency preferences, and the potential weaponisation of financial systems.

Beyond its structural neutrality, gold has historically demonstrated resilience during periods of geopolitical stress, systemic financial instability, and sovereign debt crises. While a strategic allocation to gold provides long-term portfolio stability, incorporating a tactical overlay allows investors to respond dynamically to evolving macro and geopolitical risks. This flexibility can enhance portfolio defensiveness during tail-risk events without necessitating a permanent reweighting. In this context, active management becomes essential.

Historical data supports this view: gold’s average monthly returns tend to be higher during periods of elevated geopolitical risk. This reinforces its role not just as a passive diversifier, but as an active hedge against political uncertainty.

What about gold as an inflation hedge?

Gold has long been perceived as a traditional hedge against inflation, often touted for its ability to preserve purchasing power during periods of rising prices. However, empirical evidence suggests that this relationship is far more nuanced and less reliable than commonly assumed.

Historical data reveals that gold’s correlation with actual inflation has fluctuated dramatically since the 1980s. Notably, the past five years have seen this correlation firmly in negative territory, supporting the conventional narrative of gold as a dependable inflation hedge.

A longer-term view using rolling 36-month correlations since 1978 shows a median correlation of -0.06, which is statistically negligible. This implies that over long horizons, gold has not consistently moved in tandem with realized inflation. However, when the analysis is narrowed to the post-2004 period, coinciding with the rise of gold ETFs and increased accessibility for retail and institutional investors, the median correlation improves to +0.21. This shift may reflect structural changes in market participation and investor behaviour, rather than a fundamental change in gold’s inflation sensitivity. Nonetheless, this challenges the narrative of gold being an inflation hedge.

Interestingly, gold appears to respond more to expected inflation than to actual inflation figures. Here, we define expected inflation as the median expected inflation based on the Survey of Professional Forecasters done by the Federal Reserve Bank of Philadelphia. This distinction between expected and actual inflation is critical, as markets often price assets based on forward-looking expectations rather than historical data. Yet, even here, the evidence is mixed. Gold shows negligible correlation with long-term (10-year) inflation expectations, suggesting limited utility as a strategic hedge over extended horizons.

Implications for investors

For investors with a broad range of assets, these findings underscore the importance of contextualising gold’s role within a broader portfolio. While gold may offer protection during acute inflationary episodes, its inconsistent relationship with both realised and expected inflation limits its effectiveness as a standalone inflation hedge. Instead, gold may be better positioned as a diversifier or tail-risk hedge, complementing other assets that have more direct and reliable inflation sensitivity, such as inflation-linked bonds or real assets. The paper we wrote last year still remains relevant: Emerging forces driving the price of gold and their implications for your portfolio.

How do we look at gold as a multi-asset investor?

From a multi-asset perspective, gold presents a compelling case not only as a diversifier but also as a contributor to long-term return objectives. Our approach begins with a structural view of gold’s historical performance: since the end of the gold standard in 1971, gold has delivered a real return of approximately 3.6% per annum over US inflation. This long-term premium suggests that gold can play a meaningful role in portfolios with CPI+ (or real) return objectives.

To translate this into forward-looking expectations, we combine the historical premium with current market forecasts. As of June 2025, the market-implied average inflation over the next decade stands at 2.4%, leading to an annualised expected return for gold of 6.0%. While this estimate isbased on long-term market-implied inflation, it may still reflect short-term inflation sentiment in current pricing. We believe the modest uplift above the long-term inflation target serves as a reasonable buffer for inflation uncertainty. In our portfolio modelling, we assume gold’s volatility aligns with its 10-year historical average and correlations are based on a 20-year lookback. These assumptions allow us to evaluate gold’s contribution to portfolio efficiency using a standard 70/30 equity-bond framework, with a constraint to cap gold at 10%. Our optimiser provided a portfolio that reallocated 1.5% from equities and 8.5% from bonds into gold.

The results are clear: incorporating gold into the portfolio yields a 16 basis point increase in expected returns without raising the overall risk level. This improvement shifts the efficient frontier upward, enhancing portfolio efficiency and offering a better risk-return trade-off. What’s more, as we will dive into, this shift in allocation improves the resilience of the portfolio in times of market stress, as gold has regularly acted as a safer asset class in times of market stress compared to bonds.

Gold’s value is most evident in portfolios with significant equity exposure. Because it moves differently to stocks and often strengthens during times of market turbulence or geopolitical uncertainty, it serves as a powerful complement. Its reputation as a “crisis asset” is well-earned, particularly in periods of inflation shocks or systemic instability.

Shifting just 10% of a portfolio into gold doesn’t fundamentally change the overall return profile, but it does add a meaningful benefit. Through the past 20 years, we see that this allocation has helped to incrementally soften the blow during severe market drawdowns, improving the resilience of the portfolio.

Conclusion

In summary, gold brings a range of benefits to a multi-asset portfolio. It can enhance long-term returns, diversify exposure thanks to its low correlation with equities and bonds, and provide a reliable buffer in periods of market stress. While its record as a pure inflation hedge is mixed, its ability to protect against shocks and uncertainty has often proven superior to a traditional equity-bond mix. Gold’s political neutrality also adds to its appeal as a hedge in times of geopolitical tension.

For investors, the key is to view gold in the broader context of portfolio construction. Its inclusion should be deliberate, aligned with the risks it is meant to offset. With that clarity, gold earns its place as a strategic component in diversified and actively managed portfolios.

Further reading : The case for a structural allocation to gold in portfolios