Gold is trading at all time highs.
Why do people invest in gold in the first place…and why now?

You may have seen headlines recently that gold has hit an all-time high.

Feels like a great time to talk about what it means to invest in gold, why investors oftentimes allocate some portion of their portfolios to it, and what’s happening right now.

Why Invest in Gold in the First Place?

The case for gold rests effectively on three principles. 

1). The first is that gold has historically been a store of value.  Think about the traditional asset classes we invest in: stocks and bonds. Unlike companies, gold can’t go bankrupt.  Gold can’t default on its loans.  Gold has some theoretical intrinsic value. It is a REAL asset, just like real estate — which is, at its core, land, with some intrinsic value. 

Also, think about it compared to paper currencies.  You can’t just print more gold; there’s a finite supply of it, and there’s a cost to mining it.  Gold has some historical tie to paper currencies; remember, the “gold standard” refers to a time when governments and central banks were required to hold gold reserves to back the money they issued. But this was formally abandoned in the 20th century.  

2). Which brings us to our next point: diversification. Because gold moves differently than stocks, bonds, and currencies, gold not only represents an alternative, but often acts as a hedge against adverse price moves in those other assets.

3). And most critically, it is seen as a “safe haven” asset against risk factors like inflation, political instability, and systemic banking risk.  

Many investors have traditionally kept some portion of their portfolios allocated to gold as a de facto insurance policy.  

The downside of investing in gold?  It doesn’t kick off any cash flows.  No coupons like a bond, no dividends like a stock.  So the price of gold tends to be inversely correlated to interest rates; in a low interest rate environment, you aren’t forgoing much in the way of cash flows to invest in gold.  In a high interest rate environment, you’re giving up a lot to park your money in an asset that doesn’t pay you anything while you hold it.

Why Invest in Gold NOW?

Knowing the specific downside of owning gold, it’s somewhat puzzling that gold is hitting record highs during a period of relatively elevated interest rates.  

But remember, when you are looking at interest rates — like, say, the yield on U.S. Treasuries — you are looking at NOMINAL yields.  Real yields — meaning, nominal interest rates minus annualized inflation — aren’t so high, because inflation has been somewhat sticky.  

Geopolitical tensions, and just overall uncertainty, often have investors fleeing to safe haven assets.  But investors who might otherwise simply buy U.S. Treasuries as a safe haven asset may increasingly be looking for alternatives if concerned about runaway inflation or currency devaluation.  So let’s talk about the currency relationship.

Gold and the U.S. dollar typically move in opposite directions.  A stronger USD makes dollar-denominated gold more expensive for foreign buyers, and a weak USD typically boosts demand, all else being equal.

When it comes to the U.S. dollar, recent domestic developments in the U.S. have raised concerns about the role of the U.S. dollar as the global reserve currency.  The combination of the tariff announcements in the spring and the passing of the Big Beautiful Bill this summer added to existing questions about U.S. fiscal discipline and the possibility for future increased debt burdens.  Central banks worldwide (notably, China) have been buying record amounts of gold to diversify away from the U.S. dollar.  
But the USD has actually bounced back off the post-Fed lows, and remains relatively strong due to interest rate levels.  The historical correlation has somewhat broken down.  So it’s more nuanced than simply “out of dollars, into gold”.

What Else Is Happening?

All of this becomes even more interesting in light of an article in The Economist this month.  Its claim?  That an “eccentric 25/25/25/25 portfolio” for retail investors consisting of 25% equities, 25% bonds, 25% cash, and 25% gold might offer superior returns (and protection) to the classic 60/40 stocks/bonds allocation that you’ve probably heard of. 

Within that portfolio, the theory is that:

• 25% in equities captures growth

• 25% in bonds provides stable, reliable income

• 25% in cash gives you liquidity and optionality

• 25% in gold hedges the rest of your portfolio while insulating against inflation, risk-off crises, and/or currency depreciation

Personally, I think 25% of your portfolio in gold sounds really high, both overall and from an entry level perspective.  However, I think many retail investors have some allocation to real assets in the form of not only gold but also real estate…in which case 25% of your portfolio in real assets doesn’t sound so crazy after all.

Ultimately,  investors who are piling into gold today aren’t doing so because current levels look particularly appealing.  Instead, it’s because they view it as a MORE appealing alternative than other traditional safe-haven assets and are looking for hedges against other risks in their portfolios.