The role of gold in investment portfolios: Part II
A consistent gold allocation can help smooth returns across a wide range of economic environments.

Editor’s note: Flexible Plan Investments, a leading provider of dynamically risk-managed investment strategies, first authored an extensive analysis of the role of gold in investment portfolios in 2013 and has provided periodic updates. This white paper has been recently updated for 2025 and will be presented as a guest commentary in three parts in Proactive Advisor Magazine. Part I examined broad issues related to how an investment in gold performed in specific market environments.

We are pleased to present Part II here, which looks more closely at gold’s performance in classic economic regimes. This performance further reinforces the case for gold as a vital portfolio diversifier.

Gold in different economic regimes

The examples provided in Part I of this paper show that gold can provide favorable returns and act as a critical counterbalance during the market and economic conditions investors fear most. But how does it behave under different classic economic regimes?

Bridgewater’s “All-Weather” approach to economic-regime investing, a popular concept in modern portfolio theory, identifies four different “states of the world,” characterized by rising or falling inflation/prices and rising or falling economic activity. Figure 10 provides a conceptual image of these regimes.

Download the complete white paper for more information on source data.

Source: Flexible Plan Investments

In our analysis, we considered the different environments characterized by these changes in both prices and economic activity and then adopted Bridgewater’s identifying labels:

• “Normal”: Real economic activity (real GDP) is rising, and prices (CPI) are rising.
• “Ideal”: Real economic activity (real GDP) is rising, and prices (CPI) are falling.
• “Stagflation”: Real economic activity (real GDP) is falling, and prices (CPI) are rising.
• “Deflation”: Real economic activity (real GDP) is falling, and prices (CPI) are falling.

We classified periods of unchanged data as belonging to the rising camp. Figure 11 shows how often each economic regime occurred over the time frame of our study.

Source: Flexible Plan Investments

• “Normal” conditions were by far the most common, appearing 74.64% of the time—no surprise, given central banks’ mandate to maintain low inflation rates and governments’ and private industries’ perpetual pursuit of economic growth.
• “Deflation,” the opposite of “Normal” conditions, occurred relatively infrequently (1.44%). Because falling prices and decreased economic activity can be catastrophic (as seen in Japan’s modern case study), governments generally try to avoid this situation at all costs, even if that means printing money and risking higher-than-desired inflation levels.
• “Stagflation” appeared just over 11% of the time since 1973. The most notable example occurred during the 1970s and early 1980s when prices increased amid economic strain. We returned to this condition in the first quarter of 2022.
• “Ideal” conditions were present just under 13% of the time. Such periods are an excellent environment for business expansion. While not continuous, “Ideal” conditions existed for many months between 2011 and 2015.

This three-part guest commentary
by Flexible Plan Investments explores
why investors should reconsider
their portfolio’s allocation to gold.

Part I: The dynamics of gold: Performance
under different market scenarios

Part III: The evidence-based case for an
optimal gold portfolio allocation

Figures 12 through 15 show how each asset class performed during each of these economic regimes.

Source: Flexible Plan Investments

Source: Flexible Plan Investments

Source: Flexible Plan Investments

Source: Flexible Plan Investments

Performance rankings: Gold’s consistency across economic regimes

Here, we show how the five major asset classes rank in each of the four “All-Weather” regimes. Putting the results side by side highlights gold’s steady performance.

Source: Flexible Plan Investments

This comparison reveals patterns with significant implications for portfolio construction and provides additional compelling arguments for strategic gold allocation in diversified portfolios.

Performance insights

The regime performance data underscore three key aspects of gold’s historical investment properties in line with what we found in our crisis-scenario analysis:

1. Versatility across regimes: Gold ranked in the top three in every regime, a consistency no other asset class matches. Other asset classes show more pronounced environment-specific strengths and weaknesses.
2. Stagflation protection: Gold had an annualized return of 19.16% during “Stagflation” periods, outpacing its nearest competitor by a substantial margin.
3. Not just for a crisis: Gold’s performance during “Normal” conditions (the most frequently occurring regime at 74.64% of the study period) proves it can add value in ordinary conditions. Gold returned almost 50% more than the more often included Treasurys asset class during such periods.

Portfolio implications

Our economic-regime findings support three actionable portfolio-construction principles in line with our crisis-scenario results:

1. Baseline strategic allocation: “Normal” and “Stagflation” regimes together covered roughly 86% of the study period. Gold ranked third and first in those settings, respectively. That prevalence argues for keeping a steady, strategic slice of gold in most portfolios.
2. Portfolio stability: Gold’s ability to deliver robust performance during conditions that typically challenge traditional assets makes it an exceptional potential portfolio stabilizer. During “Stagflation” periods, gold outperformed equities by 18 percentage points, representing a substantial cushion against equity weakness.
3. Tactical tool: Because gold’s performance benefits are different across economic regimes, tactical allocation adjustments based on market conditions could enhance gold’s already substantial contribution to portfolio efficiency.

Overall, our economic-regime analysis shows that a consistent gold allocation can help smooth returns across a wide range of economic environments—and that tactical adjustments may add even more benefit.

Editor’s note: This analysis demonstrates that gold’s performance in different classic economic regimes reinforces the case for gold as a vital portfolio diversifier.

These findings, and the evidence presented in Part I, set the stage to provide evidence-based conclusions surrounding optimal allocations to gold in a modern portfolio. Look for Part III, “The evidence-based case for an optimal gold portfolio allocation” in an upcoming issue of Proactive Advisor Magazine.

The opinions expressed in this article are those of the author and the sources cited and do not necessarily represent the views of Proactive Advisor Magazine. This material is presented for educational purposes only. 

This article presents an excerpt from the white paper “The Role of Gold in Investment Portfolios.” The complete paper—including a list of source data and disclosures—can be found here.

This white paper is provided for information purposes only. It should not be used or construed as an indicator of future performance, an offer to sell, a solicitation of an offer to buy, or a recommendation for any security. Flexible Plan Investments, Ltd., cannot guarantee any particular investment’s suitability or potential value. Information and data set forth herein have been obtained from sources believed to be reliable, but that cannot be guaranteed. Before investing, please read and understand Flexible Plan Investments, Ltd., ADV Part 2A and Part 3 (Form CRS) 1. Past performance does not guarantee future results. Inherent in any investment is the potential for loss as well as profit. A list of all recommendations made within the immediately preceding 12 months is available upon written request.

The original white paper, published by Flexible Plan Investments in November 2013, was written by David Varadi, David Wismer, and Jerry C. Wagner. The updated white paper, published in October 2025, was revised by Jerry C. Wagner and Daniel Poppe. flexibleplan.com