One of the main stories in financial markets over the past year has been the rise in the price of gold by around 70%, reaching record levels. There were episodes of thousands of people waiting in lines for hours to acquire this safe-haven asset. This behavior raises questions about the state of the global economy: how should this rise be interpreted, and what is the real usefulness of gold for investors?
The most frequently cited cause for this appreciation has been geopolitical risk, namely uncertainty regarding the policies of the new American administration and the possibility of the European Union seizing Russian assets. Some market participants (such as Ray Dalio of Bridgewater) interpret the rise as a sign of distrust in sovereign debt and in the dollar as a reserve currency. Gold offers the advantage of being an asset without counterparty risk, and its demand has been supported by record purchases by central banks. It also serves as diversification in a context of high valuations in other asset classes, although recent returns may be generating speculative demand through extrapolation.
An academic perspective on gold as an investment should distance itself from the speculative exercise of trying to predict its short-term evolution. Price movements in financial assets are generally very unpredictable – as would be expected in reasonably efficient markets. However, by using long samples and statistical analysis, it is possible to answer three fundamental questions:
1. Does it protect against inflation? The answer is “not quite.” The idea that gold protects against inflation (by generating higher returns when inflation rises) is largely a myth; the correlation is positive, but very weak. On the other hand, one study compared the wages of centurions in the era of Emperor Augustus with those of current Marine captains, concluding that over 2,000 years wages measured in ounces of gold did not change much. In other words, since the real value of wages undoubtedly grew, in the very long run gold preserved purchasing power and achieved a slightly positive real return.
2. Is it a good safe haven against crises? It depends on the crisis and on the definition of “safe haven.” Gold had extremely high returns during the Yom Kippur shock and the Soviet invasion of Afghanistan, and it recorded gains (more modest) on September 11, during Brexit, or following the invasion of Ukraine. Its correlation with global stock markets is slightly negative, but weak: it does not necessarily rise when stocks fall. Moreover, when we think of a safe haven, the image that comes to mind is that of a harbor where the boat remains safe in times of storm. It is not exactly a port where docked boats sometimes sink even when the sun is shining and the sea is calm. And that is what happens with gold. The metal shines, but it has a “dark side,” as it can generate extreme and prolonged losses. Between 1980 and 2000, for example, it lost almost 80% of its real value.
3. Is it a good investment? Between 1978 and October 2025, the risk premium of gold (its average return above U.S. Treasury bills) was 3.8%, a value close to that of long-term bonds. However, its volatility was higher than that of U.S. stocks (which offer much higher risk premiums). That is, as a standalone investment, gold seems to combine the worst of two worlds: it has the low return of bonds and the high risk of stocks.
Benjamin Graham, the father of Value Investing, considered gold such a mediocre investment that he said it was fortunate that American citizens were prohibited from investing in it (which was true in his time). His disciple Warren Buffett shares this view, preferring productive assets: a plot of farmland produces annual crops and still exists after a century; the gold investor, by contrast, ends the same period with the same “shiny stone,” having also borne storage and insurance costs.
Is gold therefore useless? Not necessarily. The argument of low returns for gold is valid for the special case of an investor focused on long-term profitability and unwilling to use leverage (something like Warren Buffett). For such an investor, gold is indeed not appropriate. But for investors with greater risk aversion (or willing to use leverage), gold can be attractive because it allows for better risk management.
In sum, the appeal of gold comes from having a small risk premium with very little correlation with stocks and bonds. This lack of correlation is what makes it interesting despite its high volatility. (Indeed, this is a counterintuitive example of how it is sometimes possible to reduce portfolio risk by adding small amounts of a “risky” asset.) For this reason, portfolio optimizations usually recommend a weight of 5% to 10% in gold. However, for most investors, the marginal efficiency gain is modest, and very similar performance can be achieved using only a traditional combination of stocks and bonds.
Pedro Barroso, Scientific Director of the Executive Master in Finance (MIF) at CATÓLICA-LISBON