Markets focused on trade tensions last week, as a new 25% US auto import tariff and upcoming retaliatory tariffs weighed on sentiment. Stagflation worries added to the pressure. US, Japan and UK data surprises are in stagflation territory
Global stocks fell this week, erasing earlier gains, after the US announced new tariffs. US Treasury yields held steady, while the dollar slipped on growth concerns ahead of April 2 tariff plans. Oil rose over supply fears linked to US tensions with Venezuela and Iran
Gold (XAU) rose above $3,100/oz in Asian trading Monday, maintaining its strong upward trend despite overbought signals
Stagflation fears abound on higher core PCE inflation and lower spending and consumer confidence, pushing stocks down and gold up – as we have seen in the past.
Diversification does not guarantee any investment returns and does not eliminate the risk of loss. Past performance is not necessarily indicative of future results. The resulting performance of any investment outcomes that can be generated through allocation to gold are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. The World Gold Council and its affiliates do not guarantee or warranty any calculations and models used in any hypothetical portfolios or any outcomes resulting from any such use. Investors should discuss their individual circumstances with their appropriate investment professionals before making any decision regarding any Services or investments.
This information may contain forward-looking statements, such as statements which use the words “believes”, “expects”, “may”, or “suggests”, or similar terminology, which are based on current expectations and are subject to change. Forward-looking statements involve a number of risks and uncertainties. There can be no assurance that any forward-looking statements will be achieved. World Gold Council and its affiliates assume no responsibility for updating any forward-looking statements.
Information regarding QaurumSM and the Gold Valuation Framework
Note that the resulting performance of various investment outcomes that can be generated through use of Qaurum, the Gold Valuation Framework and other information are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. Neither World Gold Council (including its affiliates) nor Oxford Economics provides any warranty or guarantee regarding the functionality of the tool, including without limitation any projections, estimates or calculations.
ETF Flows: Weekly flows were higher last week $479mn. This was mostly from North American and European Funds. Global funds lost $641mn this month driven by North America and Europe. YTD flows are higher by $1.1bn (1.1% of AUM) with inflows coming from the US and Europe.
Liquidity – COMEX net longs held steady around 300t net long for the previous week. Liquidity remains high in the gold market with daily trading volume at $127bn. This has been driven by a 15% m-o-m increase in the LBMA OTC market and 29% increase in the COMEX futures market.
Option Exposure and Volatility – 30-day realized volatility in gold picked up over the past month from 8 to 11 which is in the 80th percentile over the past year, highlighting some of the recent daily moves. Call skew remains rich suggesting investors are paying for upside exposure. Today, 5k December $1,405 - $1,485 gold option future call spreads traded on the COMEX. This represents $65bn in notional and is profitable on expiration with a move 7.5% to 14% higher.
Technicals – Gold broke back above the $1,300 level and continues to trade near its 50-day average. The 50-day should continue to act as resistance until there is a meaningful close above the level.
Broad Markets - Globally stock markets were slightly higher last week, the standout was China +7% with positive US/China trade-related talks. Stocks are climbing to start the week on trade optimism. The 2/10 curve in the US steepened to its highest levels of the year at 20bps. Commodities as a whole fell with the GSCI down 2%, led by oil down 2.5%. The US dollar was flat. President Trump lashed out at Powell and his ‘tightening policies’ over the weekend. Probability of a hike this year is at 8% and a cut at 2%, slightly more hawkish than the previous two weeks. The ECB meeting is this week and probability of a hike on the year is close to 50%.
Gold – Gold was sharply lower last week (LBMA -1.3%, XAU -2.7%) closing strongly to the downside on Friday as the US dollar strengthened and stock markets moved higher
Technicals – Gold broke support and is well below the 50-day moving average and $1,300. It stalled at ~$1,350 as we thought might happen and is starting to become slightly oversold. $1,275 is probably the next psychological support level.
Flows by time periods – Weekly flows were lower last week -$926mn. This was mostly from North American and Asian Funds. Global funds lost $1.3bn in February driven almost entirely by GLD and Huaan Yifu.
Liquidity – COMEX net longs were updated as of 2/22 and we saw and increase in net longs to 531 tonnes, the highest levels since April of last year. Gold market liquidity fell in February from $114bn to $104bn a day versus January. However, Volumes were heavy on the first day of the month at $128bn with the selloff on Friday.
Investors need to be cautious of the risks of relying too heavily on historic correlations that are prone to change
When the bond-equity correlation flips from negative to positive, a larger allocation to gold is required to retain the initial level of portfolio risk.
Reasons and consequences of a spike in bond-equity correlation
Diversification across assets is important in the construction of resilient portfolios. And for many multi-asset investors, high-quality government bonds have been a reliable diversifier for equity risk - the two assets typically reacting differently to similar economic conditions. But this relationship appears to have broken down of late. In other words, the two asset classes are now the most correlated they have been since the mid-1990s (Chart 1).
Chart 1: Gold to the rescue in a positive bond-equity correlation environment
Bond-equity & Gold-equity rolling 24-month correlations*
*Correlations are computed using monthly returns in US dollars between 31 January 1973 and 30 April 2025. Indices used: MSCI USA Index, Bloomberg US Treasury Bond Index and LBMA Gold Price PM. Source: Bloomberg, World Gold Council
It is the higher inflation environment which has, to a large extent, weakened the appeal of government bonds as a diversifier. At core inflation levels below 2.5%, the correlation between US equities and US treasuries has been, by and large, negative, providing diversification. At levels above 2.5%, this relationship has historically started to break down (Chart 2).
Chart 2: Bond-equity correlation shifts as inflation rises
Rolling 3yr correlation of US equity and US treasury returns vs. 3yr average core inflation*
*Correlations are computed using monthly returns of MSCI USA Index and Bloomberg US Treasury Bond Index from 31 January 1973 to 30 April 2025. Source: Bloomberg, World Gold Council
The lessons here are twofold:
Investors need to be cautious of the risks of relying too heavily on historic correlations that are prone to change.
The current positive correlation between bonds and equities undermines fixed income’s value proposition as a portfolio diversifier.
What is gold’s optimal weight in a positive bond/equity correlation environment?
The shift in the bond-equity correlation has presented many investors with a fundamental challenge around how to approach diversification and portfolio construction. In fact, amidst this rapidly evolving market backdrop, maintaining a diversified portfolio can feel like chasing a moving target.
Let us now illustrate how this change in correlation results in increased portfolio risk and how, in order to retain the same level of portfolio risk, the optimal allocation to gold needs to rise. Chart 3 outlines a simple hypothetical portfolio made up of three asset classes. Using just three asset classes helps us isolate the impact from the change in correlations.1
A mean variance optimisation analysis suggests that, generally speaking, a change in the bond-equity correlation environment from negative to positive results in a deterioration to the risk-adjusted returns by shifting the efficient frontier downwards (Chart 4).
Chart 3: Hypothetical optimal portfolio in a negative bond-equity correlation environment
Asset allocation: 60% US stocks, 35% US treasuries, and 5% gold*
*Based on an optimised portfolio as outlined in “Gold as a strategic asset: 2025 edition. Source: World Gold Council
Chart 4: A positive bond-equity correlation reduces portfolio returns across various levels of risk
Efficient frontier in a negative and positive bond-equity correlation environment*
*The efficient frontiers are based on monthly data for the specified assets from 31 January 1973 to 30 April 2025 Source: Bloomberg, Portfolio Visualizer, World Gold Council
In other words, all else equal, a portfolio’s risk profile rises as the correlation flips from negative to positive. Moreover, bonds become a meaningful contributor to total portfolio risk in such an environment (Chart 5).
Chart 5: Bond’s contribution to portfolio risk rises in a positive bond-equity correlation environment
Risk contribution and total portfolio risk in different correlation environment*
*Risk metrics based on data from January 1973 to April 2025 Source: Bloomberg, Portfolio Visualizer, World Gold Council
And assuming that an investor’s risk tolerance remains the same, when the correlation flips from negative to positive, the optimal asset allocation should shift too, so as to remain in the pre-defined risk budget.
In fact, the ‘optimal’ amount of gold varies according to the bond-equity correlation environment. Broadly speaking, the analysis suggests that in a positive bond-equity correlation scenario, a larger allocation to gold is required to retain the initial level of portfolio risk (Chart 6).
Chart 6: More gold is required in a positive bond-equity correlation environment to maintain the same level of volatility
Hypothetical portfolios weights in a:
*Optimal weights based on a mean-variance optimisation using monthly data for the specified assets from 31 January 1973 to 30 April 2025. Source: Bloomberg, Portfolio Visualizer, World Gold Council
Another way of looking at this is through the lens of a risk parity optimisation which seeks to achieve equal contributions to risk across various asset classes. As the correlation between bonds and equities rises so does their contribution to portfolio risk. In this scenario the optimal amount of gold again needs to rise to redistribute the risks equally (Chart 7).
Chart 7: More gold is required in a positive bond-equity correlation environment to equalise the risk contributions of portfolio assets
Hypothetical portfolios weights in a:
*Optimal weights based on a risk parity optimisation using monthly data for the specified assets from 31 January 1973 to 30 April 2025 Source: Bloomberg, World Gold Council
Conclusion
The negative correlation between returns from stocks and from bonds – once the cornerstone of a balanced portfolio is in a state of flux due to the volatile inflation backdrop. In terms of the implications for diversifying investor portfolios, it remains unclear where the equity-bond correlation will settle. But recent changes in the macroeconomic landscape call for a cautious approach. For those investors that don’t hold gold, this might prompt them to broaden their sources of diversification. For those investors that already hold gold, it might mean increasing their allocation. Especially if approaching geopolitical risks materialise and bring stagflationary concerns to the fore once again.
Footnotes
1While further analysis is required to determine the extent of gold’s increase in a broader portfolio, our previous research would suggest that is would result in a higher allocation due to gold’s effective diversification benefits across different environments.
Broad Markets – There continues to be a divergence of the equity and bond markets as equities continued their move higher with yields falling (bonds increasing) last week. Bond holders appear to believe the Fed’s recent language suggests an economic downturn in the US, while equity owners seem to believe in a new ‘Powell Put’ as stocks had their best quarter in 10 years. Stock markets in the US and Europe were 1-2% higher with Asia slightly lower. The 3m/10yr curve in the US remains negative with shorter-term rates falling. The 10-yr closed at levels last seen in 2017 when the effective Fed Funds rates were 1.3% lower. Last week, economic advisor Larry Kudlow went as far as to say the Fed needs to cut rates 50bps immediately despite the stock market again trading near all-time highs. Fed futures are pricing in a 2/3 probability of a 25bps cut and 23% chance of a 50bps cut this year. The GS Commodity index was flat, despite oil gaining 2% as precious metals fell. The US dollar gained globally, in particular, against the pound as the UK had another failed Brexit vote. There is a 4th Brexit vote scheduled today in the UK. Investors are bracing for earnings reports which come into full swing next week.
Technicals – Gold has now formed the right shoulder of a bearish head and shoulders formation. A close below $1,290 could precipitate a sharp move lower to a projected price of $1,230 or a percentage move of 5%.
Option Exposure and Volatility – With the sharp moves last week, 30-day realized volatility in gold increased to 12, which is the 99th percentile over the past year. Interestingly, implied volatility in gold remains low, both for short- and longer-dated options suggesting, investors have not yet bought into the idea it will remain volatile. There is over $1tn of options open interest in futures at the critical $1,300 level which could create resistance.
ETF flows by time periods – Weekly flows were higher last week by $256mn. This was mostly from North American Funds. Global funds had small inflows in March driven by North America, having reversed the early-month outflows. YTD flows are higher by $1.9bn (1.8% of AUM) with inflows coming from the US and Europe. We will be releasing our monthly ETF flows report this Thursday 4/4.
Liquidity – Volumes in the OTC and COMEX markets increased meaningfully in March to $125bn a day a gain of 15% m-o-m. Open interest in gold futures is at $80bn, slightly above the ytd average. COMEX net longs increased from 349t not 426t net long, the highest level since February.
Last week was peppered with global central bank meetings, with four out of five opting to keep rates unchanged, citing growing economic and political uncertainty. The US Fed has penciled in two rate cuts this year while the BoJ has indicated further hikes.
Global equity markets closed mostly higher. US stocks finally rebounded following weeks of declines and Europe equities also gained. Indian equities rose as investors bought dips while Chinese stock dropped. The 10-year US Treasury yields fell and the dollar rose as investors assessed the Fed’s future rate path and trade policy uncertainty.
Gold finally closed above the US$3,000/oz threshold. It has so far rejected technical resistance at $3,040/3,050/oz and the market is seen as highly overstretched, with a possible (healthy) pause in the core uptrend on the cards.
After the Fed’s decision to slow their QT pace, markets have been adjusting their expectations. On Wall Street, while some institutions see the end arriving in Q3 2025, others forecast some time in 2026. And the Polymarket betters are much more aggressive as the crypto-based platform shows a 100% possibility of QT ending by this May.
Chart of the week – QT lifeline: running out of time?
Diversification does not guarantee any investment returns and does not eliminate the risk of loss. Past performance is not necessarily indicative of future results. The resulting performance of any investment outcomes that can be generated through allocation to gold are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. The World Gold Council and its affiliates do not guarantee or warranty any calculations and models used in any hypothetical portfolios or any outcomes resulting from any such use. Investors should discuss their individual circumstances with their appropriate investment professionals before making any decision regarding any Services or investments.
This information may contain forward-looking statements, such as statements which use the words “believes”, “expects”, “may”, or “suggests”, or similar terminology, which are based on current expectations and are subject to change. Forward-looking statements involve a number of risks and uncertainties. There can be no assurance that any forward-looking statements will be achieved. World Gold Council and its affiliates assume no responsibility for updating any forward-looking statements.
Information regarding QaurumSM and the Gold Valuation Framework
Note that the resulting performance of various investment outcomes that can be generated through use of Qaurum, the Gold Valuation Framework and other information are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. Neither World Gold Council (including its affiliates) nor Oxford Economics provides any warranty or guarantee regarding the functionality of the tool, including without limitation any projections, estimates or calculations.
The past year has seen a dynamic tapestry of events, each thread shaping investor sentiment and asset performance. US and Australian elections stirred local markets, while ongoing geopolitical tensions kept global investors cautious (Chart 1). The US Federal Reserve initiated an easing cycle with three rate cuts totalling 100 basis points, while the Reserve Bank of Australia (RBA) held rates steady, lagging its peers.
Chart 1: Relentless parade of geopolitical risks cast a shadow over the global landscape
Geopolitical risk index*
*As of 24 January 2025 on a five-day rolling average basis. Source: GPR, World Gold Council
Assets put in a varied performance (Chart 2). The AUD weakened by 10% against the dollar – the widening US-Australia yield spread, particularly in Q4 amid diverging stances from the Fed and the RBA, was a key contributor.1 Local equities finished the year stronger and Australian properties also powered higher.2
Gold, denominated in AUD, held the lead in 2024 with a stunning 38% surge. Strong investment demand, rising geopolitical risks and a weaker AUD supported gold’s rally. And similar drivers are extending gold’s strength into 2025, delivering a 4.9% return so far.
Chart 2: Gold held the lead against a mixed performance from assets
Various asset performance in AUD during 2024*
*As of end December 2024 and 24 January 2025. Based on LBMA Gold Price PM, MSCI World Index, ASX REITs Index, Bloomberg AusBond Bank Bill Index, ASX300 Index, FTSE Global Infrastructure Index, Bloomberg AusBond Composite Index, Bloomberg Global Agg Index and FTSE Nareit Developed Index. All calculations in AUD. Source: Bloomberg, World Gold Council
2025 outlook: a case for gold in AUD to thrive?
This year is likely to be supportive for gold. As our 2025 Gold Outlook noted, while US Treasury yields and the dollar may stay elevated, upside potential for gold could come from continued central bank gold purchases and possible spikes in geopolitical risks. Meanwhile, volatility in equities and bonds, as well as potential weakness in non-US currencies, could provide additional boosts to investment demand for gold. And as uncertainty in the US bond market stay elevated, we believe the impact from yield changes may be less pronounced on gold, as our recent analysis demonstrates.
Furthermore, we believe potential weakness in the Australian dollar may provide an additional boost to gold in local currency terms. Such currency weakness may stem from two main fronts:
1. Changes in monetary policy expectations
Although the RBA left rates unchanged in its December meeting, it was noted that growth momentum had weakened and the upside risk of inflation had diminished.3 And while labour market prints may muddy the case for a cut in February, more weight in that decision may come from Q4 inflation data which shows cooling momentum. The market is currently pricing in over 80bps cuts for 2025, much higher than the previous expectation (Chart 3).4
In contrast, reflation concerns in the US and the surprising strength in both growth and labour market data have seen investors push back their expectations of further rate cuts – the market is now only pricing in around 50bps rate reduction in 2025, a pivotal change from around 100bps in December (Chart 3).
This could mean that the RBA will deliver more rate cuts than the Fed, further widening the interest rate spread between the two countries, weighing on the AUD.
Chart 3: Diverging rate expectations for 2025
Policy rate expectations reflected in OIS futures*
*Expected policy rates after each planned policy meeting in 2025 as of the end of November 2024 (purple) and end of December 2024 (blue). Source: Bloomberg, World Gold Council
2. Potential growth risk
Restrictive financial conditions, declining real income and cooling momentum in the housing sector all weighed on Australian growth in 2024. Even if markets are right about cuts, the absolute level of rates and their lagged impacts could continue to chip away at the economy’s resilience. Additionally, uncertainty surrounding Chinese economic development may also pose challenges – especially if the Trump trade war hits V2.0.5 As historical data shows, sluggish growth usually leads to a weakening local currency.
Other risks such as geopolitical challenges may also induce volatility in local assets, creating stress for Australian portfolios. This has been a key area of concern among APAC investors. Gold’s positive outlook and its ability to cushion geopolitical risks should, we believe, make it a key asset to local portfolios (Chart 4).
Chart 4: Gold has performed well during geopolitical risk surges
Performance of various assets during geopolitical risk spikes*
*Based on average weekly performances in AUD of the LBMA Gold Price PM, Bloomberg Commodity Index, Bloomberg Australian Bond Index, Bloomberg Global Bond Aggregate Index, ASX300 Index, and MSCI World Index. We show here the average of the top 10 geopolitical risk surges based on the Geopolitical Risk Index. Source: matteoiacoviello.com, Bloomberg, World Gold Council
In conclusion, after an exceptionally strong year, we believe gold has the potential to continue to shine in 2025. Although the macro environment this year may bring some headwinds, the global geopolitical landscape and risks stemming from financial markets are certain to attract attention from official institutions and retail investors. Meanwhile, the potential risk of AUD weakness could make gold more attractive in local investors’ portfolios. And over the longer term, we anticipate that gold will deliver a stable return in line with global nominal GDP growth.
Weekly Markets Monitor: Liberation Day & Stagflation
Weekly Markets Monitor
Highlights
Chart of the week – Stagflation signs clearer
Source: Bloomberg, World Gold Council
Disclaimer
Important information and disclaimers
© 2025 World Gold Council. All rights reserved. World Gold Council and the Circle device are trademarks of the World Gold Council or its affiliates.
All references to LBMA Gold Price are used with the permission of ICE Benchmark Administration Limited and have been provided for informational purposes only. ICE Benchmark Administration Limited accepts no liability or responsibility for the accuracy of the prices or the underlying product to which the prices may be referenced. Other content is the intellectual property of the respective third party and all rights are reserved to them.
Reproduction or redistribution of any of this information is expressly prohibited without the prior written consent of World Gold Council or the appropriate copyright owners, except as specifically provided below. Information and statistics are copyright © and/or other intellectual property of the World Gold Council or its affiliates or third-party providers identified herein. All rights of the respective owners are reserved.
The use of the statistics in this information is permitted for the purposes of review and commentary (including media commentary) in line with fair industry practice, subject to the following two pre-conditions: (i) only limited extracts of data or analysis be used; and (ii) any and all use of these statistics is accompanied by a citation to World Gold Council and, where appropriate, to Metals Focus or other identified copyright owners as their source. World Gold Council is affiliated with Metals Focus.
The World Gold Council and its affiliates do not guarantee the accuracy or completeness of any information nor accept responsibility for any losses or damages arising directly or indirectly from the use of this information.
This information is for educational purposes only and by receiving this information, you agree with its intended purpose. Nothing contained herein is intended to constitute a recommendation, investment advice, or offer for the purchase or sale of gold, any gold-related products or services or any other products, services, securities or financial instruments (collectively, “Services”). This information does not take into account any investment objectives, financial situation or particular needs of any particular person.
Diversification does not guarantee any investment returns and does not eliminate the risk of loss. Past performance is not necessarily indicative of future results. The resulting performance of any investment outcomes that can be generated through allocation to gold are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. The World Gold Council and its affiliates do not guarantee or warranty any calculations and models used in any hypothetical portfolios or any outcomes resulting from any such use. Investors should discuss their individual circumstances with their appropriate investment professionals before making any decision regarding any Services or investments.
This information may contain forward-looking statements, such as statements which use the words “believes”, “expects”, “may”, or “suggests”, or similar terminology, which are based on current expectations and are subject to change. Forward-looking statements involve a number of risks and uncertainties. There can be no assurance that any forward-looking statements will be achieved. World Gold Council and its affiliates assume no responsibility for updating any forward-looking statements.
Information regarding QaurumSM and the Gold Valuation Framework
Note that the resulting performance of various investment outcomes that can be generated through use of Qaurum, the Gold Valuation Framework and other information are hypothetical in nature, may not reflect actual investment results and are not guarantees of future results. Neither World Gold Council (including its affiliates) nor Oxford Economics provides any warranty or guarantee regarding the functionality of the tool, including without limitation any projections, estimates or calculations.
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Gold market highlights: Gold higher last week, ETF inflows, volumes picking up, increase in realized volatility.
Adam Perlaky
Former Senior Analyst, Americas World Gold CouncilWeek ending 15 March 2019
ETF Flows: Weekly flows were higher last week $479mn. This was mostly from North American and European Funds. Global funds lost $641mn this month driven by North America and Europe. YTD flows are higher by $1.1bn (1.1% of AUM) with inflows coming from the US and Europe.
Liquidity – COMEX net longs held steady around 300t net long for the previous week. Liquidity remains high in the gold market with daily trading volume at $127bn. This has been driven by a 15% m-o-m increase in the LBMA OTC market and 29% increase in the COMEX futures market.
Option Exposure and Volatility – 30-day realized volatility in gold picked up over the past month from 8 to 11 which is in the 80th percentile over the past year, highlighting some of the recent daily moves. Call skew remains rich suggesting investors are paying for upside exposure. Today, 5k December $1,405 - $1,485 gold option future call spreads traded on the COMEX. This represents $65bn in notional and is profitable on expiration with a move 7.5% to 14% higher.
Technicals – Gold broke back above the $1,300 level and continues to trade near its 50-day average. The 50-day should continue to act as resistance until there is a meaningful close above the level.
Globally stock markets were slightly higher last week, the standout was China
Adam Perlaky
Former Senior Analyst, Americas World Gold CouncilWeek ending 1 March 2019
You asked, we answered: Gold's optimal portfolio weight in a higher correlated environment?
Jeremy De Pessemier
Asset Allocation Strategist World Gold CouncilHighlights
Reasons and consequences of a spike in bond-equity correlation
Diversification across assets is important in the construction of resilient portfolios. And for many multi-asset investors, high-quality government bonds have been a reliable diversifier for equity risk - the two assets typically reacting differently to similar economic conditions. But this relationship appears to have broken down of late. In other words, the two asset classes are now the most correlated they have been since the mid-1990s (Chart 1).
Chart 1: Gold to the rescue in a positive bond-equity correlation environment
Bond-equity & Gold-equity rolling 24-month correlations*
*Correlations are computed using monthly returns in US dollars between 31 January 1973 and 30 April 2025. Indices used: MSCI USA Index, Bloomberg US Treasury Bond Index and LBMA Gold Price PM.
Source: Bloomberg, World Gold Council
It is the higher inflation environment which has, to a large extent, weakened the appeal of government bonds as a diversifier. At core inflation levels below 2.5%, the correlation between US equities and US treasuries has been, by and large, negative, providing diversification. At levels above 2.5%, this relationship has historically started to break down (Chart 2).
Chart 2: Bond-equity correlation shifts as inflation rises
Rolling 3yr correlation of US equity and US treasury returns vs. 3yr average core inflation*
*Correlations are computed using monthly returns of MSCI USA Index and Bloomberg US Treasury Bond Index from 31 January 1973 to 30 April 2025.
Source: Bloomberg, World Gold Council
The lessons here are twofold:
What is gold’s optimal weight in a positive bond/equity correlation environment?
The shift in the bond-equity correlation has presented many investors with a fundamental challenge around how to approach diversification and portfolio construction. In fact, amidst this rapidly evolving market backdrop, maintaining a diversified portfolio can feel like chasing a moving target.
Let us now illustrate how this change in correlation results in increased portfolio risk and how, in order to retain the same level of portfolio risk, the optimal allocation to gold needs to rise. Chart 3 outlines a simple hypothetical portfolio made up of three asset classes. Using just three asset classes helps us isolate the impact from the change in correlations.1
A mean variance optimisation analysis suggests that, generally speaking, a change in the bond-equity correlation environment from negative to positive results in a deterioration to the risk-adjusted returns by shifting the efficient frontier downwards (Chart 4).
Chart 3: Hypothetical optimal portfolio in a negative bond-equity correlation environment
Asset allocation: 60% US stocks, 35% US treasuries, and 5% gold*
*Based on an optimised portfolio as outlined in “Gold as a strategic asset: 2025 edition.
Source: World Gold Council
Chart 4: A positive bond-equity correlation reduces portfolio returns across various levels of risk
Efficient frontier in a negative and positive bond-equity correlation environment*
*The efficient frontiers are based on monthly data for the specified assets from 31 January 1973 to 30 April 2025
Source: Bloomberg, Portfolio Visualizer, World Gold Council
In other words, all else equal, a portfolio’s risk profile rises as the correlation flips from negative to positive. Moreover, bonds become a meaningful contributor to total portfolio risk in such an environment (Chart 5).
Chart 5: Bond’s contribution to portfolio risk rises in a positive bond-equity correlation environment
Risk contribution and total portfolio risk in different correlation environment*
*Risk metrics based on data from January 1973 to April 2025
Source: Bloomberg, Portfolio Visualizer, World Gold Council
And assuming that an investor’s risk tolerance remains the same, when the correlation flips from negative to positive, the optimal asset allocation should shift too, so as to remain in the pre-defined risk budget.
In fact, the ‘optimal’ amount of gold varies according to the bond-equity correlation environment. Broadly speaking, the analysis suggests that in a positive bond-equity correlation scenario, a larger allocation to gold is required to retain the initial level of portfolio risk (Chart 6).
Chart 6: More gold is required in a positive bond-equity correlation environment to maintain the same level of volatility
Hypothetical portfolios weights in a:
*Optimal weights based on a mean-variance optimisation using monthly data for the specified assets from 31 January 1973 to 30 April 2025.
Source: Bloomberg, Portfolio Visualizer, World Gold Council
Another way of looking at this is through the lens of a risk parity optimisation which seeks to achieve equal contributions to risk across various asset classes. As the correlation between bonds and equities rises so does their contribution to portfolio risk. In this scenario the optimal amount of gold again needs to rise to redistribute the risks equally (Chart 7).
Chart 7: More gold is required in a positive bond-equity correlation environment to equalise the risk contributions of portfolio assets
Hypothetical portfolios weights in a:
*Optimal weights based on a risk parity optimisation using monthly data for the specified assets from 31 January 1973 to 30 April 2025
Source: Bloomberg, World Gold Council
Conclusion
The negative correlation between returns from stocks and from bonds – once the cornerstone of a balanced portfolio is in a state of flux due to the volatile inflation backdrop. In terms of the implications for diversifying investor portfolios, it remains unclear where the equity-bond correlation will settle. But recent changes in the macroeconomic landscape call for a cautious approach. For those investors that don’t hold gold, this might prompt them to broaden their sources of diversification. For those investors that already hold gold, it might mean increasing their allocation. Especially if approaching geopolitical risks materialise and bring stagflationary concerns to the fore once again.
Footnotes
1While further analysis is required to determine the extent of gold’s increase in a broader portfolio, our previous research would suggest that is would result in a higher allocation due to gold’s effective diversification benefits across different environments.
Back in 2016 when negative yields were last a hot topic we published this note... Market Update:
Alistair Hewitt
Former Head of Market Intelligence World Gold CouncilAlistair Hewitt
Financial Times
Alistair Hewitt
Former Head of Market Intelligence World Gold CouncilAlistair Hewitt
Financial Times
There continues to be a divergence of the equity and bond markets
Adam Perlaky
Former Senior Analyst, Americas World Gold CouncilWeekly Markets Monitor: Gold claims US$3,000/oz
Weekly Markets Monitor
Highlights
Chart of the week – QT lifeline: running out of time?
Source: Bloomberg, World Gold Council
Disclaimer
Important information and disclaimers
© 2025 World Gold Council. All rights reserved. World Gold Council and the Circle device are trademarks of the World Gold Council or its affiliates.
All references to LBMA Gold Price are used with the permission of ICE Benchmark Administration Limited and have been provided for informational purposes only. ICE Benchmark Administration Limited accepts no liability or responsibility for the accuracy of the prices or the underlying product to which the prices may be referenced. Other content is the intellectual property of the respective third party and all rights are reserved to them.
Reproduction or redistribution of any of this information is expressly prohibited without the prior written consent of World Gold Council or the appropriate copyright owners, except as specifically provided below. Information and statistics are copyright © and/or other intellectual property of the World Gold Council or its affiliates or third-party providers identified herein. All rights of the respective owners are reserved.
The use of the statistics in this information is permitted for the purposes of review and commentary (including media commentary) in line with fair industry practice, subject to the following two pre-conditions: (i) only limited extracts of data or analysis be used; and (ii) any and all use of these statistics is accompanied by a citation to World Gold Council and, where appropriate, to Metals Focus or other identified copyright owners as their source. World Gold Council is affiliated with Metals Focus.
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Gold to keep lifting Australian portfolios in 2025
Ray Jia
Head of Research (Asia Pacific, ex-India) and Deputy Head of Trade Engagement (China) World Gold CouncilMarissa Salim
Senior Research Lead, APAC World Gold CouncilSummary
2024 recap: AUD weak, equities strong, gold stronger
The past year has seen a dynamic tapestry of events, each thread shaping investor sentiment and asset performance. US and Australian elections stirred local markets, while ongoing geopolitical tensions kept global investors cautious (Chart 1). The US Federal Reserve initiated an easing cycle with three rate cuts totalling 100 basis points, while the Reserve Bank of Australia (RBA) held rates steady, lagging its peers.
Chart 1: Relentless parade of geopolitical risks cast a shadow over the global landscape
Geopolitical risk index*
*As of 24 January 2025 on a five-day rolling average basis.
Source: GPR, World Gold Council
Assets put in a varied performance (Chart 2). The AUD weakened by 10% against the dollar – the widening US-Australia yield spread, particularly in Q4 amid diverging stances from the Fed and the RBA, was a key contributor.1 Local equities finished the year stronger and Australian properties also powered higher.2
Gold, denominated in AUD, held the lead in 2024 with a stunning 38% surge. Strong investment demand, rising geopolitical risks and a weaker AUD supported gold’s rally. And similar drivers are extending gold’s strength into 2025, delivering a 4.9% return so far.
Chart 2: Gold held the lead against a mixed performance from assets
Various asset performance in AUD during 2024*
*As of end December 2024 and 24 January 2025. Based on LBMA Gold Price PM, MSCI World Index, ASX REITs Index, Bloomberg AusBond Bank Bill Index, ASX300 Index, FTSE Global Infrastructure Index, Bloomberg AusBond Composite Index, Bloomberg Global Agg Index and FTSE Nareit Developed Index. All calculations in AUD.
Source: Bloomberg, World Gold Council
2025 outlook: a case for gold in AUD to thrive?
This year is likely to be supportive for gold. As our 2025 Gold Outlook noted, while US Treasury yields and the dollar may stay elevated, upside potential for gold could come from continued central bank gold purchases and possible spikes in geopolitical risks. Meanwhile, volatility in equities and bonds, as well as potential weakness in non-US currencies, could provide additional boosts to investment demand for gold. And as uncertainty in the US bond market stay elevated, we believe the impact from yield changes may be less pronounced on gold, as our recent analysis demonstrates.
Furthermore, we believe potential weakness in the Australian dollar may provide an additional boost to gold in local currency terms. Such currency weakness may stem from two main fronts:
1. Changes in monetary policy expectations
Although the RBA left rates unchanged in its December meeting, it was noted that growth momentum had weakened and the upside risk of inflation had diminished.3 And while labour market prints may muddy the case for a cut in February, more weight in that decision may come from Q4 inflation data which shows cooling momentum. The market is currently pricing in over 80bps cuts for 2025, much higher than the previous expectation (Chart 3).4
In contrast, reflation concerns in the US and the surprising strength in both growth and labour market data have seen investors push back their expectations of further rate cuts – the market is now only pricing in around 50bps rate reduction in 2025, a pivotal change from around 100bps in December (Chart 3).
This could mean that the RBA will deliver more rate cuts than the Fed, further widening the interest rate spread between the two countries, weighing on the AUD.
Chart 3: Diverging rate expectations for 2025
Policy rate expectations reflected in OIS futures*
*Expected policy rates after each planned policy meeting in 2025 as of the end of November 2024 (purple) and end of December 2024 (blue).
Source: Bloomberg, World Gold Council
2. Potential growth risk
Restrictive financial conditions, declining real income and cooling momentum in the housing sector all weighed on Australian growth in 2024. Even if markets are right about cuts, the absolute level of rates and their lagged impacts could continue to chip away at the economy’s resilience. Additionally, uncertainty surrounding Chinese economic development may also pose challenges – especially if the Trump trade war hits V2.0.5 As historical data shows, sluggish growth usually leads to a weakening local currency.
Other risks such as geopolitical challenges may also induce volatility in local assets, creating stress for Australian portfolios. This has been a key area of concern among APAC investors. Gold’s positive outlook and its ability to cushion geopolitical risks should, we believe, make it a key asset to local portfolios (Chart 4).
Chart 4: Gold has performed well during geopolitical risk surges
Performance of various assets during geopolitical risk spikes*
*Based on average weekly performances in AUD of the LBMA Gold Price PM, Bloomberg Commodity Index, Bloomberg Australian Bond Index, Bloomberg Global Bond Aggregate Index, ASX300 Index, and MSCI World Index. We show here the average of the top 10 geopolitical risk surges based on the Geopolitical Risk Index.
Source: matteoiacoviello.com, Bloomberg, World Gold Council
In conclusion, after an exceptionally strong year, we believe gold has the potential to continue to shine in 2025. Although the macro environment this year may bring some headwinds, the global geopolitical landscape and risks stemming from financial markets are certain to attract attention from official institutions and retail investors. Meanwhile, the potential risk of AUD weakness could make gold more attractive in local investors’ portfolios. And over the longer term, we anticipate that gold will deliver a stable return in line with global nominal GDP growth.
Footnotes
1See: Australia's central bank closer to cutting rates, Feb not ruled out | Reuters and Fed Turns Hawkish, Signals Fewer 2025 Cuts: What This Means for Banks | Nasdaq
2See: Bull and bear cases for Australian shares in 2025 and How Australia’s Property Market Changed in 2024 – in 10 charts
3For more, see: 10 December 2024 | Minutes of the Monetary Policy Meeting of the Board | RBA
4Based on end-2025 rate expectation in the OIS market.
5For more, see: POTUS 47: What could Trump 2.0 mean for global trade? | UBS United States of America