The role of gold in investment portfolios: Part III
Updated analysis supports an optimal portfolio allocation to gold of 18%.

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. The white paper has been recently updated in 2025 and is being 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. Part II looked at gold’s performance in different classic economic regimes—reinforcing the case for gold as a vital portfolio diversifier.

We are pleased to present Part III here. FPI’s research shows that gold enhances risk-adjusted returns across a wide range of allocation levels, with an optimal allocation of 18% over the study period.

Gold’s diversification edge: Low correlation with key asset classes

So far, our analysis has shown that gold can offer diversification in several different crisis scenarios and economic regimes. But how does gold correlate with traditional asset classes such as stocks and bonds?

Figure 16 shows that while gold has not outperformed equities over our study period, it also has not moved in tandem with either stocks or bonds—a critical characteristic for portfolio diversification.

Source: Flexible Plan Investments

Correlation coefficients, which range from -1 to 1, measure how closely the returns of two assets move together. A coefficient of 1 means the assets move perfectly in sync, and -1 means they move in an opposite or alternating fashion. Table 4 shows gold’s correlation with some basic asset classes.

Source: Flexible Plan Investments

Gold’s highest absolute correlation with any other asset class is just 0.44, with commodities. This relatively modest relationship partly reflects gold’s inclusion within commodity indexes but still underscores its independence from broader commodity markets.

The asset class least correlated with gold was the U.S. dollar. This moderately negative correlation reflects gold’s monetary properties as an alternative to fiat currency, particularly during periods of dollar weakness.

Even more revealing are gold’s correlations with the primary components of conventional portfolios:

• Equities (correlation: 0.01): A practically zero correlation indicates that gold’s price movements show virtually no relationship with stock market performance. This statistical independence is particularly valuable in portfolio construction, suggesting gold can maintain its value during equity market stress.
• Bonds (correlation: 0.04): A similarly negligible correlation with fixed income demonstrates that gold moves independently from interest-rate-driven bond performance.

The relationships shown in Table 4 help explain why adding gold to traditional portfolios improves risk-adjusted returns, as illustrated in the analysis that follows. Gold has maintained its diversification benefits across multiple monetary policy environments, economic regimes, and market cycles, showing its ability to protect portfolios when other asset classes struggled. These correlation properties are neither theoretical nor temporary; they’ve held steady over the five-decade study period. This evidence supports a fundamental reconsideration of gold’s role as a strategic core allocation with unique and persistent diversification benefits.

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 II: Evaluating gold’s performance under
classic economic regimes

Ways to incorporate gold into a portfolio

To evaluate gold’s potential role in a diversified portfolio, we tested several ways of incorporating it into a portfolio. These include adding gold in varying amounts to a traditional balanced portfolio to determine the historical “optimal” allocation, replacing the bond allocation of such a portfolio entirely with gold, and comparing physical gold with gold mining stocks. Each approach offers useful insights into how gold can contribute to portfolio resilience.

Adding gold to a balanced portfolio: The historical ‘optimal’ allocation

Research from the World Gold Council highlights the growing institutional interest in gold as a strategic diversifier. Its 2022 study reported a robust 10% annual growth in global gold investment demand as sophisticated investors seek enhanced portfolio resilience. The research found that gold allocations between 4% and 15% consistently improved risk-adjusted returns across portfolio types and geographic regions over the past decade.

But has gold historically improved risk-adjusted returns for a more typical portfolio? And what has been the optimal allocation to gold for such a portfolio? These are more practical questions than identifying the optimal allocation across a broad universe of asset classes more commonly held in large pension portfolios.

First, let’s define “typical.” A widely used model is the traditional “balanced portfolio,” with 60% allocated to equities and 40% to bonds.

We used this portfolio structure to test gold’s diversification potential. By allocating varying percentages of the portfolio to gold, we examined whether it could improve historical risk-adjusted returns. In this analysis, stocks are represented by the S&P 500 Index and bonds by the Bloomberg U.S. Intermediate Treasury Bond Index.

Figure 17 shows how the risk-adjusted return ratio (Sharpe ratio) changed with different gold allocations from 1973 to 2024. For reference, the Sharpe ratio of the traditional 60/40 balanced portfolio over that period was 0.97.

Source: Flexible Plan Investments

The first “dot” on the chart represents a traditional balanced portfolio. All dots on and to the left of the vertical line represent portfolios that outperform a balanced portfolio in terms of risk-adjusted returns. These portfolios lie on what the financial literature calls the “efficient frontier.”

To make it easier to evaluate specific allocation levels, Table 5 lists the gold allocation percentages alongside the corresponding total portfolio risk-reward ratios.

Source: Flexible Plan Investments

Table 5 shows that it has been possible to allocate as much as 35% to gold in a portfolio while still maintaining a superior risk-reward ratio compared to a traditional balanced portfolio. It also identifies the historical “optimal” allocation from a risk-reward standpoint: 18% in gold and 82% in a balanced portfolio.

Table 6 compares the performance of this “optimal portfolio” with both a portfolio composed entirely of gold and the traditional balanced portfolio.

Source: Flexible Plan Investments

Table 6 reveals that the optimal portfolio delivered a slightly higher return than the balanced portfolio, along with lower annualized risk and a higher risk-adjusted return than either the gold-only or traditional balanced portfolio.

In 2022, many market commentators declared the balanced portfolio “dead.” This proclamation was made after stocks and bonds declined simultaneously in response to the Federal Reserve’s hawkish pivot amid surging inflation. With neither asset class providing a hedge, the traditional 60/40 balanced portfolio experienced an 18.04% drawdown for the year. In contrast, the optimal portfolio had a drawdown of 16.04%, offering investors additional protection in that environment.

It’s important to note that this 18% “optimal” gold allocation reflects a calculation based specifically on Sharpe ratio optimization during the 1973–2024 study period. Different performance metrics or time periods would likely yield different results. This backward-looking analysis does not predict future optimal allocations, as market conditions, correlations, and asset behaviors change over time. The term “optimal” here refers to the historical risk-adjusted returns as measured by the specific methodology employed in this study.

Replacing bonds with gold in a balanced portfolio

Considering gold’s beneficial role in a portfolio of stocks and bonds, we explored a hypothetical scenario: What if the entire bond allocation in a traditional balanced portfolio were replaced with gold? We compared the historical performance of a portfolio composed of 60% stocks and 40% gold to that of a traditional balanced portfolio of 60% stocks and 40% bonds (Table 7).

Source: Flexible Plan Investments

This is strictly a thought experiment, not a suggested allocation. A portfolio composed of only equities and gold would likely lack optimal diversification, as reflected in its lower Sharpe ratio compared to the equity/bond/gold portfolio discussed earlier. Although equities and gold lack correlation over the long term, there are times when both may decline simultaneously. Without bonds in the mix, there would be no third asset to help offset those losses. In fact, a similar breakdown happened in 2022, when stocks and bonds fell together—an unusual event that challenged the 60/40 balanced portfolio. This example reinforces the historical advantage of adding gold to a balanced portfolio, as shown earlier, rather than replacing bonds with it.

Still, the results are quite interesting. While the stocks/gold portfolio had a lower Sharpe ratio, it produced a higher MAR risk-reward ratio due to its higher return and lower maximum drawdown. Annualized returns (CAGR) were more than 1% higher, and the maximum drawdown over the period was lower than that of the traditional stock-bond combination. These findings further support gold’s potential as a diversifier.

As with any historical analysis, this comparison reflects past performance and is not a projection of future results. Asset allocation decisions should always be based on an investor’s financial situation, investment goals, and risk tolerance.

Gold vs. gold mining stocks

For investors looking to gain exposure to gold, gold mining stocks—shares of companies that primarily mine gold ore—offer a potential avenue. However, while these companies’ fortunes are tied to the price of gold, their performance is also influenced by operational costs and other business factors specific to each gold miner. Consequently, returns on physical gold and the gold mining stocks can diverge significantly.

While gold prices and the returns of gold mining stocks tend to move in the same direction, the strength of that relationship is worth analyzing. From 1993 to 2024, the correlation between gold and the NYSE Arca Gold Miners Index was 0.77, suggesting a strong but imperfect link. However, despite this high correlation, their long-term performance differed markedly. Figure 18 tracks the growth of one dollar invested in both gold and the Gold Miners Index from 1993 (when the Index was introduced) through 2024.

Source: Flexible Plan Investments

Over this 30-year period, gold was the stronger performer. Table 8 summarizes key risk and return statistics for both assets.

Source: Flexible Plan Investments

While exposure to gold mining stocks may provide additional diversification, gold’s stand-alone performance has been significantly better. Over the period, gold outperformed gold mining stocks by nearly four percentage points annually and did so with less than half the annualized risk.

This analysis is intended for educational purposes, reflecting how different forms of gold exposure have historically performed. Investors should consider their individual circumstances and consult with a financial professional before determining the best way to incorporate gold exposure into their portfolios.

The evidence-based case for strategic gold allocation

More than five decades of market data presents a compelling case for rethinking gold’s role in modern portfolios. Our research shows that gold enhanced risk-adjusted returns across a wide range of allocation levels, with an optimal allocation of 18% over the study period. This equates to approximately 49% stocks, 33% bonds, and 18% gold—an outcome that may surprise many investors and financial professionals.

While this optimal mix is hypothetical and presented for illustrative purposes, it outperformed the traditional 60/40 balanced portfolio in terms of risk-adjusted return. Perhaps most surprisingly, investors during the period studied could have allocated as much as 35% to gold and still achieved superior risk-adjusted returns compared to a standard balanced portfolio.

These findings challenge conventional thinking about gold’s role in portfolio construction. Smaller allocations are more commonly assumed to be sufficient, yet the historical data supports a broader range. Our results align with other alternative allocation frameworks, such as Harry Browne’s “Permanent Portfolio,” which recommends equal 25% allocations to stocks, bonds, cash, and gold across different economic environments. The historical evidence suggests that traditional investment wisdom could be underestimating gold’s potential contribution to long-term portfolio performance.

As investors navigate an increasingly complex global landscape characterized by periods of great uncertainty, gold’s strategic importance appears stronger than ever. Investment professionals may wish to reassess their current allocations in light of this historical evidence, recognizing gold’s demonstrated ability to enhance returns and reduce portfolio volatility across multiple market cycles.

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