Long-term returns, liquidity and effective diversification all benefit overall portfolio performance. In combination, they suggest that the addition of gold can materially enhance a portfolio’s risk-adjusted returns.
Our analysis of investment performance over the past 3, 5, 10 and 20 years emphasises gold’s positive impact on an institutional portfolio (Chart 11).
It shows that an average USD portfolio would have achieved higher risk-adjusted returns and lower drawdowns if 2.5%, 5%, 7.5% or 10% were allocated to gold (Chart 12 and Table 1).
Chart 12: Adding gold over the past 20 years would have increased risk-adjusted returns of a hypothetical USD portfolio
Risk-adjusted returns of a hypothetical portfolio with and without gold*
Chart 12: Adding gold over the past 20 years would have increased risk-adjusted returns of a hypothetical USD portfolio
Chart 12: Adding gold over the past 20 years would have increased risk-adjusted returns of a hypothetical USD portfolio
Risk-adjusted returns of a hypothetical portfolio with and without gold*
*Based on US dollar performance between 31 December 2004 and 31 December 2024.
Source: Bloomberg, ICE Benchmark Administration, World Gold Council
Sources:
Bloomberg,
ICE Benchmark Administration,
World Gold Council; Disclaimer
*Based on US dollar performance between 31 December 2004 and 31 December 2024.
Table 1: Gold has increased risk-adjusted returns while reducing portfolio volatility and maximum drawdowns
Comparison of a hypothetical USD portfolio and an equivalent portfolio with 5% gold over the past 3, 5, 10 and 20 years based on US-dollar returns*
3-year
5-year
10-year
20-year
No gold
5% gold
No gold
5% gold
No gold
5% gold
No gold
5% gold
Annualised returns
2.5%
2.6%
7.7%
7.9%
5.5%
5.6%
6.3%
6.4%
Annualised volatility
11.6%
11.3%
11.9%
11.5%
9.5%
9.2%
9.9%
9.6%
Risk-adjusted return
21.5%
22.8%
64.5%
68.2%
57.9%
60.5%
63.3%
66.9%
Maximum drawdown
-19.9%
-19.3%
-19.9%
-19.3%
-19.9%
-19.3%
-35.3%
-33.0%
*As of 31 December 2024. Source: Bloomberg, ICE Benchmark Administration, World Gold Council
In addition to a traditional historical simulation, a mean variance optimisation analysis suggests that an allocation to gold may result in a material enhancement to portfolio risk-adjusted returns by shifting the efficient frontier upwards. For example, a portfolio with gold could deliver a higher return for the same level of risk, or the same return for a lower level of risk (Chart 13).
Chart 13: Gold could significantly improve risk-adjusted portfolio returns across various levels of risk
Efficient frontier of a hypothetical average portfolio*
Chart 13: Gold could significantly improve risk-adjusted portfolio returns across various levels of risk
Chart 13: Gold could significantly improve risk-adjusted portfolio returns across various levels of risk
Efficient frontier of a hypothetical average portfolio*
*As of 31 December 2024.
Source: Bloomberg, ICE Benchmark Administration, Portfolio Visualizer, World Gold Council
The ‘optimal’ amount of gold varies according to individual asset allocation decisions. Broadly speaking, the analysis suggests that the higher the risk in the portfolio – whether in terms of volatility or concentration of assets – the larger the required allocation to gold, within the range in consideration to offset that risk (Chart 14).
Chart 14: The optimal gold allocation varies depending on the level of risk in the portfolio
The gold allocation that could deliver the maximum risk-adjusted return for each hypothetical portfolio mix
Chart 14: The optimal gold allocation varies depending on the level of risk in the portfolio
Chart 14: The optimal gold allocation varies depending on the level of risk in the portfolio
The gold allocation that could deliver the maximum risk-adjusted return for each hypothetical portfolio mix
*As of 31 December 2024.
Source: Bloomberg, ICE Benchmark Administration, Portfolio Visualizer, World Gold Council
