To what extent does gold increase risk-adjusted returns?

The fact that the addition of gold can improve the risk-adjusted return of an investor portfolio has been sufficiently proven by studies such as ‘Gold as an asset class for institutional investors’ by Mercer in 2024. In its latest study ‘Gold as a strategic asset: 2025 edition’, the World Gold Council calculated the impact of adding gold to a portfolio and the optimum gold allocation for each type of investor for investment horizons of 3, 5, 10 and 20 years, up to the end of 2024. The calculations were based on historical US capital market data.

Longer-term additions to gold lead to higher portfolio returns

The calculation of the risk-adjusted portfolio returns with and without gold allocation was based on a hypothetical portfolio consisting of 50 per cent stocks from both industrialised nations and emerging markets, 40 per cent government and corporate bonds and 10 per cent alternative investments such as REITs, hedge funds and commodities. While the risk-adjusted portfolio returns for a 3-year investment horizon increased by only 1.3 per cent from 21.5 to 22.8 per cent due to the addition of 5 per cent gold, it increased by 3.7 per cent for a 5-year investment horizon. With a 10 and 20-year gold allocation, the return increased by 3.4 and 3.6 per cent, respectively.

The more risk-friendly the portfolio composition, the higher the gold allocation should be

As the model calculation shows, for a very conservative portfolio with only 35 per cent stocks, 60 per cent bonds and 5 per cent alternative investments, a gold allocation of 5 per cent is already sufficient to optimise risk-adjusted returns. For an average portfolio (50 per cent stocks, 40 per cent bonds and 10 per cent alternative investments), the necessary gold allocation increases to 6.6 per cent. For a higher risk profile with the portfolio made up of 65 per cent stocks, 15 per cent alternative investments and only 20 per cent bonds, the gold allocation should be increased to 10.1 per cent to achieve the desired effect on the risk-adjusted returns.