Gold’s Worst Quarterly Performance Since 2013 Reassesses Its Role as Portfolio Hedge

Gold, traditionally considered a portfolio diversifier and safe-haven asset, endured a punishing second quarter, yet investors should weigh carefully before discarding the precious metal from their allocations. Gold futures lost more than 13% over the quarter, the steepest decline since 2013. Typically viewed as a refuge amid uncertainty, the metal has nonetheless experienced turbulence even as geopolitical tensions escalated. Since the outbreak of the Iran war, gold futures have dropped 21%, following record highs touched earlier this year. On Wednesday, gold futures slipped 0.2% as oil prices climbed and the Middle East conflict deepened, while the S&P 500 fell roughly 0.5%. Over the past three months, the trajectories of gold futures and the S&P 500 have contrasted sharply.

Such movement may spark concern that gold’s hedging prowess is fading, but investors ought to recalibrate their expectations for the metal and its portfolio function. “The hedging role is there, but it’s probably a little more inconsistent than you would think,” noted Roger Aliaga-Diaz, global head of portfolio construction at Vanguard. “It’s not a rule that every time there’s an equity drawdown that you’ll have gold there to offset that.”

Historically, gold has demonstrated resilience during major geopolitical shocks. An analysis by JPMorgan Private Bank found that between 1985 and 2024, gold delivered an average four-week return of 1.8% and a median return of 3% in the run-up to and during such events, while the 10-year Treasury and equities posted average declines of 1.6% and median losses of 1.9%. The metal also serves as a hedge against dollar weakness, Aliaga-Diaz added: “When you have situations where perhaps the value of the dollar, the stability of the dollar and the credibility of the Fed are called into question, that’s probably when you will see flows going into gold.”

Advisors caution that a common mistake is expecting gold to move inversely to stocks with consistency. “I don’t see gold as a direct hedge against the stock market, but it’s a great hedge against fear,” said Sam Huszczo, certified financial planner and founder of SGH Wealth Management in Lathrup Village, Michigan. “It’s a fine diversifying tool in a small amount.” Because gold’s volatility can mirror that of equities, Aliaga-Diaz recommends keeping holdings modest; most advisors suggest capping allocation at 5%.

For long-term planning, a second-quarter setback does not warrant abandoning gold entirely. Instead, investors should evaluate the metal’s place in a broader strategy, their volatility tolerance, and position size. “You want to think about it in a longer-term time frame; you can’t look at one quarter in isolation,” said Rafia Hasan, chief investment officer of Perigon Wealth Management, who advocates a 1% to 2% allocation. “I think there’s potentially a role for commodities as a diversifier more broadly,” she added. “That said, commodity prices tend to be more volatile, and I think this last quarter is certainly an illustration of that.”

Source link