Register For Our Mailing List

Register to receive our free weekly newsletter including editorials.

Home / 532

Why your portfolio should consider 5% gold

Determining the value of gold can at times make potential investors hesitant. Being unable to judge what the price might do reduces confidence in making an informed decision. Gold in Australian Dollars (AUD) breached A$3,000 this year dipping slightly by the end of the first half of 2023, before reaching a record high in the last week. Now sitting above A$3,100, the geo-political events over the last three weeks demonstrate how hard it is to time the market. So, when is the right time to buy, or even increase, a gold allocation into a portfolio?

The global gold market is valued in US Dollars (USD). Gaining insight into such aspects as US real rates and the strength of the USD can help indicate what the price might do in the short to medium term. However, the gold market is much deeper and broader than just these two factors. Its demand is boosted by both economic growth and uncertainty. Since gold is a global asset, demand tailwinds from one region may counteract headwinds from another. These counterfactors pose their own challenges but also give gold its core characteristics as a unique investment.

Factors influencing the gold price

Without interest or dividends, typical discounted cash flow models fail when assessing gold. So too do other valuation tools often used for shares and bonds. Gold does not have any expected earnings or book-to-value ratios. But there is a good reason why it does not pay a coupon: with no issuer; it carries no credit risk.  Its price is determined by the intersection of demand and supply, (with Australia being one of the world’s largest suppliers). Understanding these drivers, can give more assurance into what determines performance.

There is often a misconception that positive economic growth is bad for gold. The recent inflation figures from both the RBA (5.2%) and the Fed (3.7%), as well as other major economies has been encouraging. While these Consumer Price Indices (CPI) numbers have ticked up slightly, the consensus view is that we’re reaching late stages of the inflation cycle, with rates close to peaking. Eventually, there be come a time when talk shifts to rates decreasing to help kickstart local economies, and thereby enhance consumer spending.

As almost half (44%) of gold’s demand originates from the jewellery and technology sectors, economic improvement generally results in increased appetite for such items. This is where regional demand tailwinds are relevant. Consumer demand, while global, is heavily weighted towards China and India who account for over half of jewellery demand.

Investment demand (38%) can over the short term, exert strong pressure on gold’s price. This type of tactical demand from physical markets, exchange-traded securities and over-the-counter (OTC) products has historically experienced increases during periods of economic and political uncertainty, and falls as confidence grows. As gold is one of the most active daily traded assets, there is a tendency to suggest that it is highly volatile. Yet, in reality, over the medium to long-term, it is less volatile than Australian Real Estate Investment Trusts, and on par with the ASX 200.

Central Banks account for almost a fifth (18%) of gold demand to help diversify reserves. In the past, many have been forced to print more money. This increase in supply, while helping to stave off economic turmoil, carries the cost of devaluing the currency. Gold, by contrast, is a finite physical commodity whose supply can’t easily be added to. It is a natural hedge against inflation.

But diversification matters

All prudent investors will be mindful that protecting long-term investments is fundamental. When determining an investment strategy, questions over protection are generally focused upon;

  • Is the portfolio diversified enough?
  • Are the right defensive assets in place?
  • Does the portfolio have liquidity available?

There is no standard diversification model. Investment appetite, fund life stages, and personal sentiment can result in allocations varying from one portfolio to another. But, according to a recent Calastone report, Australian investors fled managed international equity, property and mixed asset funds at a record level during Q2 2023. Fixed income funds were the beneficiaries. Given the higher interest rate environment, this is not too surprising. Many investors look upon these products as fulfilling a traditional role of diversification, offering protection during periods when risk assets have come under pressure. In the main, fixed income products certainly help, but they are not absolute.

When inflation is below 2%, the correlation between global equities and treasuries has been negative, providing diversification. At levels above 2%, this relationship has historically started to break down.

The right gold allocation

Understanding the broader drivers of gold’s price can improve investor confidence, and unlike some other defensive assets, gold has various demand sources, which complement the other over different economic and market conditions.

The answer to when there is a good time to buy gold depends upon the investor’s strategy and objectives. A diversified portfolio needs the insurance over the medium to long term to help ride out unforeseen market events. Gold can help achieve that, but can also stand its ground in calmer times (if history is anything to go by). Therefore, there is never a bad time to think about the right allocation.

 

Jaspar Crawley is Head of Institutional Investor Relationships, APAC ex-China at World Gold Council, a sponsor of Firstlinks. This article is for general informational and educational purposes only and does not amount to direct or indirect investment advice or assistance. You should consult with your professional advisers regarding any such product or service, take into account your individual financial needs and circumstances and carefully consider the risks associated with any investment decision.

For more articles and papers from World Gold Council, please click here.

Advertisement

  •   25 October 2023
  • 2
  •      
  •   

RELATED ARTICLES

Investors need to look beyond bonds for safety

Inflation: A rare SMSF consideration

What keeps the world’s most patient investors returning to gold

banner

Most viewed in recent weeks

It’s time for LICs to die

A high-profile dividend cut and a prominent fund manager’s apology have reignited a long-running debate. If investors can access similar exposures more cheaply and efficiently elsewhere, what exactly is keeping LICs alive?

Testamentary trusts survived the trust tax. The drafting battle has just begun.

The fight over testamentary trusts looked settled. Then the draft legislation arrived. Hidden in a technical detail is a question that could force many families to rethink wills they thought were already future-proof.

The new capital gains tax trap for your portfolio

Investors have long accepted one portfolio rule without much question. A major tax shift could change that calculation entirely, forcing difficult trade-offs between risk, discipline and an overlooked cost lurking beneath.

The retirement scorecard: how many of these questions can you answer?

From the maths of retirement, estimating spending and picking the right asset allocation to survive a poor decade, here are the questions every retiree – current or future – should be able to answer for themselves.

How the typical Australian Family could save $844,350 in taxes

The value of a testamentary trust is not determined by wealth alone. Depending on circumstances, it can reduce the tax burden on inherited income, create efficiencies and help build intergenerational wealth.

The housing slide could become a crash

House prices are sliding across Australia, yet the most dangerous ingredient for a housing crash is still missing. If job losses surge amid growing economic risks, today's correction could become a historic property downturn.

Latest Updates

Testamentary trusts: Treasury has picked the wrong reading

A decades-old estate planning tool has survived one tax crackdown only to be caught by another. The surprise isn't who the reform is targeting, but who could end up paying the price for drafting choices made years ago.

Latest from Morningstar

Does an American retirement rule work for Australians?

The 4% rule has survived decades of scrutiny, but Australia's retirement system changes the equation in ways most overlook. Before accepting or rejecting this rule of thumb, it pays to understand what really drives retirement outcomes.

Shares

Glencore lands on the ASX. Should BHP and Rio shareholders switch?

A coal-heavy miner with governance concerns isn't the obvious choice for investors. Yet, Glencore's ASX listing may offer something BHP and Rio can't. The challenge is working out whether the opportunity outweighs the risks.

Why does the system treat capital gains and losses differently?

Investors are often told not to let tax policy drive their investment decisions. Yet, under the new CGT rules, portfolio construction, volatility and even how assets are owned may have an outsized impact on their final outcome.

Economy

Three common sense reforms that Australia needs

What do frozen bank accounts, mortgage traps and pension penalties have in common? They're all symptoms of a system that makes life much harder. Yet the obvious solutions seem to have escaped the attention of Canberra.

Shares

The hidden cost of government debt for investors

Some of the important effects of rising public debt never make the headlines. Research shows the immediate effects may already be unfolding, influencing corporate behaviour in ways that many investors would never suspect.

Investment strategies

When do fundamentals matter?

Is fundamental investing losing its grip on markets? Investors continue to search for valuation-based explanations for every price move, but the dominant force behind short-term returns may be something else altogether.

Sponsors

Alliances

  • ASA-Logo-RGB-ActiveGreen-web.png

© 2026 Morningstar, Inc. All rights reserved.

Disclaimer
The data, research and opinions provided here are for information purposes; are not an offer to buy or sell a security; and are not warranted to be correct, complete or accurate. Morningstar, its affiliates, and third-party content providers are not responsible for any investment decisions, damages or losses resulting from, or related to, the data and analyses or their use. To the extent any content is general advice, it has been prepared for clients of Morningstar Australasia Pty Ltd (ABN: 95 090 665 544, AFSL: 240892), without reference to your financial objectives, situation or needs. For more information refer to our Financial Services Guide. You should consider the advice in light of these matters and if applicable, the relevant Product Disclosure Statement before making any decision to invest. Past performance does not necessarily indicate a financial product’s future performance. To obtain advice tailored to your situation, contact a professional financial adviser. Articles are current as at date of publication.
This website contains information and opinions provided by third parties. Inclusion of this information does not necessarily represent Morningstar’s positions, strategies or opinions and should not be considered an endorsement by Morningstar.