Gold’s ability to protect portfolios during market stress, preserve purchasing power and deliver competitive long-term returns is strengthening the case for Australian investors to treat the precious metal as a strategic portfolio holding rather than a short-term defensive trade.
A new State Street Investment Management white paper, Gold for Australian investors: A portfolio diversifier with staying power, argues that relatively modest allocations can materially improve portfolio characteristics. Its modelling found that adding between 2% and 10% gold to a hypothetical Australian multi-asset portfolio between April 2010 and June 2026 improved cumulative returns while reducing maximum drawdowns.
State Street ultimately favours a more conservative strategic allocation of around 2% to 5%, reflecting gold’s tendency to underperform for extended periods during strong-growth, low-inflation environments.
The investment manager also sees supportive conditions for gold continuing, pointing to central bank demand, geopolitical tensions, inflation hedging, concerns over the US fiscal position and the potential for longer-term de-dollarisation.
Gold has delivered competitive long-term returns
Gold’s appeal is not solely defensive.
Since the US abandoned the gold standard in 1971, the US-dollar gold price has risen at a compound annual growth rate of 8.7%, from US$41 per ounce to US$4,008 per ounce as of June 30, 2026.
For Australian investors, its performance during periods of elevated inflation has been particularly notable. Since 2000, gold generated an average annual real return of 16.6% when Australian CPI was above 3% year-on-year, compared with 5.1% for Australian bonds and 0.2% for Australian equities.
The paper nevertheless stresses that gold is not a perfect inflation hedge in all environments, with its strongest historical performance tending to occur when inflation becomes unusually high rather than during moderate price increases.
Liquidity is another distinguishing feature. Global gold trading volumes averaged more than US$361 billion per day in 2025, putting the market alongside some of the world’s largest currency, fixed-income and equity markets.
Australian dollar exposure adds another defensive layer
For Australian investors, movements in the Australian dollar have historically had relatively little impact on gold’s medium-term investment case.
State Street found a -0.35 correlation between gold priced in Australian dollars and the AUD/USD exchange rate using daily data since 1995, while the correlation between AUD and USD gold prices was 0.74.
That relationship means Australian-dollar gold can provide some protection when the local currency weakens during periods of market stress.
Over 30 years to June 2026, gold measured in Australian dollars returned an annualised 8.6%, with volatility of 15.7%, compared with an 8.2% return and 16.4% volatility when measured in US dollars.
Diversification becomes most valuable when markets fall
Gold’s low correlation with equities and bonds sits at the centre of State Street’s investment case.
Over the past 30 years, correlations between gold and major equity markets including the ASX 200 have ranged from around zero to negative. Its correlation with the Australian bond market was also relatively low at about 0.30.
Those diversification benefits have historically become more pronounced during sharp equity market sell-offs.
Across 14 S&P 500 drawdowns greater than 15%, gold returned an average 5.9%, compared with a 23.7% decline for the S&P 500. Gold produced positive returns in 11 of those 14 periods.
The paper also finds gold has remained negatively correlated with a traditional stock-bond portfolio since the 2008 financial crisis, contrasting with alternatives including private equity, REITs and hedge funds, whose correlations have been considerably higher.
State Street calculated that adding a 10% gold allocation to a traditional 60/40 portfolio would have reduced drawdowns during major stress events by an average 2.46 percentage points, outperforming comparable allocations to other liquid alternatives.
Portfolio modelling supports modest gold allocation
The strongest quantitative case comes from State Street’s hypothetical Australian multi-asset portfolio.
From January 2010 to June 2026, a portfolio with no gold allocation generated an annualised return of 8.09%, annualised volatility of 7.58% and a maximum drawdown of 11.41%.
Adding 5% gold lifted annualised return to 8.20%, lowered volatility to 7.17% and reduced the maximum drawdown to 10.68%.
At a 10% allocation, annualised return increased to 8.28%, volatility fell to 6.79% and maximum drawdown narrowed to 9.76%.
These figures are hypothetical back-tested results rather than actual portfolio performance and exclude management fees and transaction costs.
Why bigger is not necessarily better
Despite those results, State Street cautions against making gold an oversized portfolio position.
Gold returned just 1.3% annually between 1995 and 2004 and 3.4% between 2011 and 2018, periods when equities and bonds generated considerably stronger returns. Its absence of income can also become a disadvantage when bonds and other assets are offering attractive yields.
This helps explain State Street’s preferred strategic allocation of 2% to 5%.
The group estimates that gold has historically delivered a premium of around 2% to 4% over cash, with an average premium of 2.5% annually since 1971, but argues smaller allocations are better suited to capturing diversification benefits without allowing prolonged gold underperformance to weigh too heavily on total portfolio returns.
Gold versus Bitcoin
The report also pushes back against the description of Bitcoin as “the new gold”.
Gold has broader underlying demand from jewellery, technology, central banks and investment, while its average daily trading volume in 2025 was almost 7 times Bitcoin’s.
More importantly for portfolio construction, their behaviour during market stress has differed sharply.
During US equity drawdowns of more than 15%, State Street calculated that a 10% gold allocation would have reduced the average drawdown of a global 60/40 portfolio by 1.7 percentage points, while a 10% Bitcoin allocation would have increased it by 0.8 percentage points.
What investors should watch next
The outlook for gold will continue to depend on inflation, interest rates, currency trends, geopolitical risk and central bank buying.
For Australian investors seeking exposure, options include physical bullion, physically backed ETFs, managed funds and gold mining equities, although State Street stresses that mining companies introduce operational and corporate risks that are distinct from direct exposure to bullion.
The broader conclusion is that gold’s strongest role is likely to remain defensive: complementing equities, bonds and real assets rather than replacing them, and providing a source of liquidity and diversification when traditional portfolio relationships come under pressure.