Should Gold Be in Your ETF Portfolio?

Smart investing is about balancing risk and reward. Gold, for instance, has been trading at record highs recently. For many, gold seems a popular addition to an ETF portfolio—but why? Let’s explore gold’s historical role as a store of value, its benefits, and its potential downsides.

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🔍 The Historical Significance of Gold

Gold has long been regarded as a safe-haven asset, valued for thousands of years as a form of wealth preservation. Throughout history, during times of economic uncertainty, investors have turned to gold to protect their portfolios. In modern investing, gold is often included in ETFs like the SPDR Gold Shares ETF (GLD) or iShares Gold Trust (IAU), making it easier for investors to gain exposure without physically owning it.

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📈 Pros: Hedge Against Inflation and Portfolio Diversification

One of the key claims of gold is its ability to hedge against inflation. When inflation erodes the value of cash, gold tends to retain or appreciate in value. For instance, during the inflationary 1970s, gold prices skyrocketed, offering a buffer for investors. Since 2001, gold has again experienced a sharp rise in value.

Gold also serves as a diversification tool. It typically moves independently of traditional asset classes like stocks and bonds. When stock markets experience volatility, gold can offer stability. For instance, our All Weather-Inspired ETFs portfolio incorporates gold, reflecting Ray Dalio’s idea of building a portfolio that can weather various economic cycles. This portfolio allocates 30% to Vanguard Total Stock Market ETF (VTI) for broad U.S. equity exposure, 40% to Vanguard Long-Term Treasury ETF (VGLT), 15% to iShares 3-7 Year Treasury Bond ETF (IEI), with 8% in PowerShares DB Commodity Index Tracking Fund (DBC) and 7% in SPDR Gold Trust (GLD) for inflation protection.

Portfolio Highlights: YTD: +9%, 1YR: +15%, CAGR: +7.1% since November 2009, Max Drawdown: -22%.

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💼 Cons: Lack of Income and Volatility

However, gold isn’t without its drawbacks. Unlike stocks or bonds, gold doesn’t generate income. There are no dividends or interest payments, limiting its appeal for income-seeking investors.

Gold’s effectiveness as an inflation hedge also fluctuates over time, just as economic conditions do. Between 1980 and 2001, gold fell in real terms by more than 80%, and between 2011 and 2015 by more than 40%. While it has performed well in certain periods, its long-term returns have not always matched other asset classes.

As noted in a CFA Institute blog post, gold's performance as an inflation hedge is inconsistent, with its relationship to inflation highly dependent on the prevailing economic environment.

The chart below, showing gold adjusted for inflation since 1980, illustrates that gold can be volatile and isn’t always a steady protection against inflation.

💼 Takeaway

Gold offers both benefits and drawbacks. It provides some protection against inflation and diversification during market turmoil, but lacks income generation and can be volatile. As of September 13th, dominant Gold ETFs like IAU and GLD manage approximately $30B and $70B, respectively.

With Tradingview you can can easily track and view beautiful charts of Gold and Gold ETFs such as IAU and GLD.

At Quantlake, we integrate Gold ETFs in select portfolios such as All Weather-Inspired, Bogle+, or Growth & Stability, with weights varying between 2% and 7%.

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Happy Long-Term Investing from the Quantlake Team!