Following one of the strongest multi-year advances in its history, gold has entered a period of correction. This naturally raises the question: has the fundamental investment case for holding gold changed, or does the decline simply reflect a repricing of short-term expectations?
The price of gold appears to respond to several factors operating over different time horizons. Some of the factors that carried gold higher in 2024 and 2025 have weakened, while others remain firmly in place. Distinguishing cyclical pressure and structural support is essential to understanding whether recent weakness represents a change in trend or merely a pause within a longer-term bull market. Our conclusion is that the role of gold in a diversified portfolio has not fundamentally changed.
Performance
For much of the last 30 years, Gold has kept pace with, and at times outperformed, the strongest major equity market in the world – the S&P 500. From September 2015 through the peak in January 2026, gold returned ~16% annually, modestly ahead of the 15% annualized return of the S&P. 2026 has been a different story. From its all-time high of about $5,600 in the final days of January, gold fell nearly 40% by the end of June, while the S&P 500 gained roughly 8%.
Source: Bloomberg, TwinFocus
Reasons for holding gold
Gold is different from other commodities. Though an input for industrial and decorative uses, this demand is limited and as such gold is largely viewed and held as a monetary asset. Gold is indestructible with consistent production and prices that largely reflect changes in demand.
While it is possible to take tactical positions based on expectations around sentiment and monetary policy, the role of gold in a diversified portfolio is typically viewed as:
- Inflation and/or currency depreciation hedge. These risks are linked as currency depreciation typically translates into higher inflation. Gold tracks inflation over the longer-term, particularly during episodes of sharply rising inflation or very high inflation, though the relationship is imperfect and shorter-term correlation is low.
- Event risk hedge. Gold is viewed as a flight-to-safety asset, along with the US dollar, US Treasuries and the Japanese Yen, as historically large equity market drawdowns have coincided with positive cumulative returns for gold through the trough.
Factors that correlate with gold
As a result, there are several factors that correlate to gold prices and are viewed as drivers of price.
Real interest rates. Gold is a non-yielding asset and holding it carries an opportunity cost relative to interest-bearing assets. Historically, this cost was evident in the high negative correlation between gold and real interest rates (ρ ≈ -0.91) from 2003–2021. Recently, this relationship has weakened, turning moderately positive from 2022–2024 (ρ ≈ +0.45) while reverting to modestly negative from 2025–2026 (ρ ≈ -0.32).
Source: Bloomberg, TwinFocus
US Dollar. Gold is generally priced in US dollars, with a stronger dollar making gold more expensive for non-dollar buyers, implying an inverse relationship. In practice, this link is not especially strong with two factors pulling in opposite directions: historically both have been viewed as flight-to-safety assets, rising together during periods of heightened uncertainty and market dislocations, while dollar demand rises with yields while gold demand has generally fallen.
Inflation expectations. Despite prominence in media narratives, inflation expectations do not exhibit a reliable relationship with gold. As was the case in September 2025, inflation expectations have been stable and while gold may be discounting a different path or outcome than by the TIPS curve, it does not appear gold has dropped due to declining inflation expectations.
Geopolitical uncertainty. Gold typically benefits from demand for safe-haven assets during periods of heightened geopolitical uncertainty. While gold has historically been positively related to measure of uncertainty, the correlation is moderate and negative more recently. In 2025, gold moved higher as policy uncertainty fell post “Liberation Day” while gold peaked in January before falling in Q1 2026 as uncertainty rose with the start of the war in Iran. Gold may be related to policy uncertainty, but it is still unclear if the price reflects a significant “fear premium”.
What happened in Q1 2026?
The changing signs and interrelationship of these factors suggest they reflect correlation not causality.
It is not coincidental that the term “gold bug” emerged in the 1930s, a period marked by declining trust in traditional financial assets and monetary frameworks. In more recent decades, debasement concerns have become more prominent with persistently large fiscal deficits and a rising debt burden. As such, we suspect the performance of gold reflects policy changes that have affected the perception of the US dollar as store of value and changing its status from an asset held by necessity to an asset held by choice.
Conclusion
Overall, we view gold as a store of value and do not believe its role in a diversified portfolio has fundamentally changed.
Gold remains a strategic, long-term allocation within many TwinFocus portfolio solutions. We view gold primarily as a portfolio diversifier and risk-management tool that complements traditional financial assets by helping preserve purchasing power over long investment horizons and enhancing portfolio resilience during periods of market stress, elevated inflation, geopolitical uncertainty, or shifts in monetary policy.
While gold has, at times over the past few years, traded more closely in line with other risk assets, its strategic value is best evaluated across full market cycles rather than over isolated periods of performance. The past three years have been an exceptional period for gold, with prices benefiting from a unique combination of persistent inflation concerns, robust central bank purchases, heightened geopolitical uncertainty, and evolving expectations surrounding global monetary policy. More recently, during the second quarter, renewed upward pressure on interest rates, uncertainty surrounding the Federal Reserve’s leadership transition, and changing expectations for inflation and future policy have contributed to broader market volatility and reinforced the importance of maintaining diversified portfolio
As with any asset class, gold will inevitably experience bouts of underperformance, but those short-term fluctuations should not detract from its enduring role as a source of diversification within a well-constructed portfolio. Our conviction remains unchanged: current allocations reflect a disciplined, long-term portfolio construction process rather than a directional market call. We are not attempting to speculate on near-term price movements or time the market. Instead, we continue to believe that maintaining an appropriate strategic allocation to gold can strengthen diversification and improve portfolio resilience over the long term.
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