Gold experienced its worst quarter since 2013, with futures shedding over 13%. Despite its typical role as a safe-haven asset, its recent performance amidst geopolitical tensions has raised questions about its effectiveness as a portfolio hedge.
Experts advise that gold’s hedging capabilities are not always consistent with stock market declines, and its volatility can sometimes resemble that of equities. However, historical data shows gold’s resilience during geopolitical shocks and its function as a hedge against dollar instability. Advisors generally recommend modest allocations, typically no more than 5%, and emphasize viewing gold within a long-term investment strategy.
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Gold, long considered a safe-haven asset and a crucial portfolio diversifier, has experienced a particularly brutal second quarter, marking its worst performance since 2013. Despite shedding over 13% in recent months, investors are being urged to reconsider before completely removing gold from their investment strategies.
The precious metal's typical role as a buffer against market downturns has been tested amid a backdrop of heightened geopolitical tensions. Gold futures have seen a significant decline, falling 21% since the start of the Iran war, a stark contrast to their record highs earlier in the year. Even recent trading saw gold futures dip 0.2% as oil prices surged and Middle East conflicts escalated, while the S&P 500 dropped approximately 0.5% on the same day. This volatility raises questions about gold's effectiveness as a hedging tool.
Experts suggest that the expectation of gold consistently moving in direct opposition to stock market declines might be misplaced. "The hedging role is there, but it's probably a little more inconsistent than you would think," stated Roger Aliaga-Diaz, Vanguard's global head of portfolio construction. "It's not a rule that every time there's an equity drawdown that you'll have gold there to offset that." Aliaga-Diaz also noted that gold's volatility can sometimes mirror that of stocks, a factor investors often overlook.
Historically, gold has demonstrated resilience during periods of significant geopolitical shocks. Analysis by JPMorgan Private Bank revealed that gold averaged a four-week return of 1.8% and a median return of 3% in the lead-up to and during major geopolitical events between 1985 and 2024. In contrast, the 10-year Treasury and stocks posted average declines of 1.6% and median losses of 1.9%, respectively, during similar periods. Furthermore, gold can act as a hedge against the U.S. dollar, especially when the dollar's stability or the Federal Reserve's credibility is in question, according to Aliaga-Diaz.
Sam Huszczo, a certified financial planner and founder of SGH Wealth Management, views gold not as a direct stock market hedge, but as a powerful hedge against fear and a valuable diversifying tool when held in small amounts. Financial advisors generally recommend keeping gold allocations to a maximum of 5%, with some, like Rafia Hasan, chief investment officer of Perigon Wealth Management, suggesting a more conservative 1% to 2% allocation.
"You want to think about it in a longer-term time frame; you can't look at one quarter in isolation," Hasan advised. She also pointed to the broader role of commodities as diversifiers, while acknowledging their inherent volatility, as illustrated by gold's recent performance. Investors are encouraged to assess gold's place within their long-term financial plans, considering their tolerance for volatility and the overall size of their gold holdings.
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