- Gold enjoyed a strong run in 2025, and into the new year, with the precious metal seen as a hedge against geopolitical uncertainty
- But gold and silver prices have experienced significant volatility in recent days
- Several structural issues limit gold’s usefulness in a strategic asset allocation context and mean it’s hard to value and predict
- Why AJ Bell avoids direct exposure to gold in its funds and MPS
Ian Aylward, head of investment partnerships at AJ Bell, comments:
“Gold, and silver, prices have been particularly volatile in recent days. So what’s going on and why have we avoided any direct exposure in AJ Bell’s portfolios?
“Gold is often viewed as an attractive hedge in a multi-asset portfolio due to its low correlations with equities and bonds. In recent months it has benefited from its perception as a ‘safe haven’ asset accompanied by central bank buying, interest rate cuts, moves away from US dollar denominated assets and persistent geopolitical uncertainties. These factors explain why some investors consider it and other precious metals as useful diversifiers amid recent surges in price.
“However, the exponential price rise has meant that, in recent days, any volatility or change of view by the marginal buyer prompts corrections that can be very significant. It is against this backdrop that several structural issues limit gold’s usefulness in a strategic asset allocation (SAA) context within portfolios.
“Firstly, gold and other precious metals are fundamentally difficult to value because they produce no income in the form of dividends or other cash flows. With no yield or traditional valuation tools, models used to build long‑run expected returns can quickly become unusable. There are few ways to ascertain whether it is cheap or expensive. This makes gold hard to incorporate into SAA frameworks such as ours.
“Secondly, gold has historically also gone through long periods (such as from the 1980s to the early 2000s) where its price moved sideways despite high volatility, offering little guidance on future returns or potential price breakouts.
“Gold is also inherently volatile, as we have seen over the weekend, with risk characteristics closer to equities than to defensive assets. Its annualised volatility (around 17%) is significantly higher than US Treasuries (around 8%) and broadly comparable to equity indices (see chart below). This doesn’t tick the boxes of a typical ‘safe haven’ asset from our perspective and limits its reliability for drawdown protection in diversified portfolios. Other precious metals, such as silver, can often be even more volatile than gold.
Source: LSEG Refinitiv data
“Fourthly, gold’s defensive qualities during crises have been inconsistent. In severe liquidity events, such as the 2008 great financial crisis and the early Covid‑19 shock, gold actually initially sold off alongside risk assets as investors liquidated positions to raise cash. This behaviour shows gold may act as a second‑phase crisis hedge rather than a reliable first‑line risk reducer, weakening its defensive appeal.
“Finally – and this refers specifically to the last couple of years – another challenge is the breakdown in gold’s historic relationship with real yields (see chart below). Real yields are the yields on bonds after taking into account inflation. Gold typically moves inversely to real yields, because as the returns from bonds rise the ‘opportunity cost’ of moving out of bonds into gold is greater and so becomes a disincentive to buy gold.
“However, in recent years gold prices have risen sharply even as real yields have increased. The current divergence is stark and suggests that the price is stretched and vulnerable to correction.
Source: LSEG Refinitiv data
“In summary, it’s hard for us to find a place for gold within our portfolios, especially at the current price level. At a time like this, we are reminded of Warren Buffett’s view that, ‘Gold gets dug out of the ground in Africa, or some place. Then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility. Anyone watching from Mars would be scratching their head.’”