Gold has long occupied a unique position in institutional portfolios. However, unlike equities, bonds, or credit instruments, it generates no cash flow and has limited industrial utility relative to other commodities. Yet across decades of market cycles, it has persisted as a strategic allocation - primarily because investors view it as protection against systemic risk.

The key question, however, is not whether gold can hedge risk, but which risks it actually hedges and under what conditions.

 

Gold and equity market stress

Gold is often described as a hedge against equity declines but the relationship is more nuanced than history suggests. Over short horizons, gold’s correlation with equities can be unstable and even turn positive. During liquidity-driven sell-offs, for example, in the early phase of the 2008 financial crisis or the initial COVID market shock, gold has sometimes declined alongside equities as investors prioritise cash and margin coverage.

Gold tends to exhibit stronger defensive characteristics during prolonged periods of systemic uncertainty rather than during sudden drawdowns. When financial stress evolves from a market correction into a broader confidence shock involving banking stability, sovereign risk, or monetary credibility, gold historically attracts capital as a store of value.

In this sense, gold functions less as a day-to-day equity hedge and more as tail-risk insurance. Its value lies not in offsetting routine volatility, but in preserving relative value when investors question the resilience of the financial system.

 

Gold as an inflation hedge

Gold’s reputation as an inflation hedge is similarly conditional. Over long multi-year horizons, gold has generally preserved real purchasing power, particularly during sustained inflation regimes such as the 1970s or the post-pandemic inflation cycle. However, the key driver is not headline inflation alone, but the interaction between inflation and monetary policy.

Gold tends to perform most strongly when real interest rates are falling or negative. When inflation rises faster than nominal yields, eroding real returns on bonds, the opportunity cost of holding gold declines, supporting demand. Conversely, when central banks respond aggressively with rate hikes that push real yields higher, gold often faces structural pressure even if inflation remains elevated.

For professional investors, this distinction matters. Gold does not hedge inflation mechanically; it hedges monetary debasement risk, particularly when policymakers struggle to maintain positive real yields.

 

Gold and the US dollar relationship

Because gold is priced globally in US dollars, it typically exhibits an inverse relationship with the currency. A weaker dollar lowers the price of gold for non-US investors, thereby supporting demand, whereas a stronger dollar can suppress gold prices by tightening global financial conditions.]

That said, this inverse correlation is not absolute. Structural demand shifts have become an increasingly important source of support for gold. Sustained purchases by emerging-market central banks seeking to diversify reserves away from dollar-denominated assets, alongside broader geopolitical fragmentation of currency reserves, have reduced the market’s reliance on traditional drivers such as US dollar strength or real interest rates alone.

For institutional portfolios, the dollar relationship therefore remains important, but it should be viewed as a macro influence rather than a deterministic pricing rule.

 

When gold actually works as a hedge

Taken together, gold’s defensive performance tends to be strongest when multiple macro pressures align: declining real yields, elevated geopolitical risk, currency uncertainty, and weakening confidence in financial institutions. It is less effective in environments characterised by strong growth, tightening monetary policy, and rising real returns on fixed income.

This explains why gold can appear inconsistent as a tactical hedge while remaining valuable as a strategic portfolio stabiliser. Its function is not to outperform risk assets during normal cycles, but to provide diversification against low-probability, high-impact systemic scenarios.

 

Conclusion

For professional investors, the evidence suggests that gold should not be viewed as a universal hedge against equities, inflation, or currency moves in isolation. Instead, it operates as a conditional hedge whose effectiveness depends on broader macroeconomic regime dynamics - particularly real interest rates and systemic confidence.

In that role, gold continues to serve a legitimate purpose. However, not as a trading instrument for routine volatility, but as a long-duration allocation. An allocation designed to protect portfolios against structural financial stress and monetary instability.

Back to News