It doesn’t pay a dividend, it doesn’t grow earnings, and you can’t build a discounted cash flow model around it. And yet, I have invested in businesses that are exposed to the gold price for many years. So, why do I invest in gold?
The answer, ironically, is found in what gold doesn’t do. It doesn’t depend on a single business or sector. It doesn’t rely on central bank goodwill. And it doesn’t care whether markets are in ‘risk-on’ or ‘risk-off’ mode. It simply… is.
Gold is a peculiar asset. Beloved by some, ridiculed by others, ignored by many. But for me, it has earned a seat at the table – not because I think it will soar during the next inflationary surge (it might, but I’m not relying on it), but because of the unique characteristics it brings to a portfolio.
Let’s unpack why I hold it and what I think many investors get wrong about it.
3 Reasons To Own Gold
1 – Gold Is Not Closely Correlated With Equity Prices
Gold has a low correlation to both equities and bonds – across geographies. That includes:
- Australian, US and global ex-US equities
- Australian and global government and corporate bonds
The chart below shows the correlation between the price of gold in AUD and (in order)
- Australian shares,
- US shares,
- Global shares (ex-US),
- Australian corporate bonds,
- Australian government bonds,
- Global bonds.
The x-axis shows the correlation values – a value of +1 means they move perfectly together, 0 means there’s no relationship, and -1 means they move in exactly opposite directions.
AUD Gold correlation with other asset classes
More importantly, gold has historically shown negative correlation to equities during major market drawdowns1. It didn’t prevent drawdowns entirely – in fact, it often fell in the early stages of a crash2, presumably due to liquidity-seeking behaviour – but it usually bounced back more quickly than equities.
During the Dotcom Crash, the GFC, and the Covid Crash, gold served as a rare source of ballast for diversified portfolios.
2 – The Market For Gold Is Very Liquid
Despite its reputation as a sleepy asset, gold is one of the most liquid markets in the world. In 2024, its daily trading volume was higher than US Treasury bills or the Dow Jones Industrial Average, and only about 25% below the S&P 5003.
3 – Gold Generates Long Term Returns Somewhat Similar To Equities
Gold has delivered returns roughly in line with equities over the long run.
Sources: S&P Dow Jones Indices, World Gold Council. Note: S&P 500 returns in USD. Data as of 18 April, 2025
Note that the S&P/ASX 200 returns do not include franking credits, which for eligible investors, can easily add more than 1% per annum to total returns.
Does Gold Protect Investors From Inflation?
Now, while gold is often considered to help protect investors against inflation, that’s not the reason I invest in it. While the idea is entrenched in financial folklore, the data doesn’t support it over most relevant timeframes. Several studies have found that gold’s relationship with inflation is weak or inconsistent at best5,6.
That doesn’t mean gold is useless in an inflationary environment – it just means that if that’s your primary reason for owning it, you may be disappointed.
Is It Better To Invest In Gold or Gold Miners?
I do invest in gold miners, developers, and explorers. But I don’t view them as a substitute for direct gold exposure.
Yes, miners tend to have a higher correlation to the gold price than general equities. But they’re also more volatile and more correlated with broader equity markets7. In short, they’re a leveraged play on gold sentiment – not a pure exposure to the metal itself.
That said, I do think there’s a case to be made for investing in gold miners, especially at the smaller end of the market.
Are Small-Cap Gold Stocks A Good Investment?
There’s no data tracking the aggregate performance of managers who specialise in ASX small cap gold stocks – which is a shame.
I believe private investors with the right combination of geological understanding, equity investing acumen, and psychological discipline can earn excess returns by backing the right ASX-listed small-cap gold stocks. However, those lacking a combination of specific geological knowledge and experience investing in mining companies could also blow up their capital.
In other words, I believe small-cap gold stocks offer an opportunity for investors to profit from specific insights about which management teams and gold mines are worth backing. At the same time, this can be a risky area to invest, so small-cap gold stocks should be treated with caution by most investors.
Gold Mining Share Prices Somtimes Diverge From Gold Prices
Occasionally, we also see meaningful disconnects between gold miners and the gold price.
For instance, from the March 2021 low to the June 2024 high, AUD gold rose by 63.4%8. Over the same period, the ASX Gold Index (XGD) rose just 33.3%9. From June 2024 to now*, XGD is up 59.8%, while gold has risen 46.4%.
This shows how sometimes it will be better to invest directly in gold, while other times the option of investing in ASX-listed gold stocks might be more attractive.
P/E Ratios Of ASX-Listed Gold Stocks
If you’re using price-to-earnings ratios (PE ratios) to value gold miners, be warned: you’re probably being misled.
A trailing PE can look deceptively low just as earnings are about to fall, and high when the cycle is turning up. A forward PE just reflects consensus assumptions about the future gold price. Neither is particularly useful. In fact, if you’d relied on analyst forecasts, you likely would have missed much of the recent rally in gold miners discussed above!
Gold has run hard over the last two years, especially in the last month. I wouldn’t be shocked to see some retracement from current levels, so if I didn’t already own gold, I’d consider averaging in at this point. Any pullback should be seen as an opportunity to add to positions, given it appears geopolitical uncertainty is here to stay.
3 Ways To Profit From Gold Price Rises
Now that I’m a permanent fixture at A Rich Life, I’ll continue to focus on high-quality, non-resource small caps – but I’ll also be publishing occasional coverage on resource companies.
I’ve written a separate article exclusively for A Rich Life Supporters that covers three ways to gain exposure to the gold price, available on the ASX, including:
- The product I use for direct exposure to the gold price
- A listed fund I own that targets small-cap resources stocks
- An under-the-radar WA-based gold producer that’s ramping up operations.
*17 April 2025.
Sources:
- Gold Price Forecast – S&P 500 and gold: short-term divergence
- Market Index – Why is gold selling off amid market turmoil?
- World Gold Council – Gold trading volumes
- Morningstar – Australia has the highest dividend yields in the world
- PMC – Is gold a hedge against inflation?
- Aye et al. (University of Pretoria) – Is gold an inflation hedge?
- CAIA – Gold miners vs gold: risk and return
- Gold Price.org – Gold price AUD
- Market Index – S&P/ASX All Ordinaries Gold (Sub Industry)
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Disclosure: The author and editor of this article both have a financial interest in gold. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 343937).