Inflation, Currency Risk and Diversification: Where Gold Does and Does Not Fit

Gold is one of the few assets that can gain value when everything seems to be going wrong in financial markets. But the precious metal doesn’t always outperform index funds or even fixed income products.

Knowing what influences gold’s price movements can help investors gauge the optimal times to accumulate the precious metal and when to patiently wait on the sidelines.

Here's what prospective investors need to know about the role of inflation, currency risk, market uncertainty and diversification when it comes to adding gold to their portfolios.

Rising inflation can boost gold

Gold will always hold intrinsic value. It has remained a medium of exchange for thousands of years while outliving every fiat currency to date.

One reason why is that while central banks can buy gold, they cannot print the precious metals. But those same institutions can increase the supply of fiat currency. The printing of paper money erodes the value of each unit, thereby reducing purchasing power by requiring more dollars for the same products, services and resources like gold.

In turn, that very money printing power creates what is referred to as currency risk. If a currency is printed excessively, all of the extra money supply will result in higher gold prices. Currency risk also explains why other commodities perform well during economic cycles with high inflation.

However, gold won't perform as well during economic cycles with low inflation, when stocks tend to rally alongside low inflation. But that same environment can result in flat or declining gold prices.

Still, precious metals have catalysts other than high inflation, including economic and market uncertainty, which helps gold as an asset that is generally uncorrelated with the stock market and lets it occasionally act as an inverse hedge when equities are under pressure.

Gold works well during periods of uncertainty

Economic and market uncertainty bodes well for gold. Precious metals saw large gains at the start of 2025 as President Donald Trump announced a plethora of high tariffs. Stocks fell during that time as investors grappled with trade uncertainty.

Although this scenario may make gold seem like a winner in uncertain times, investors only get the maximum upside if they hold gold during calm market cycles.

The tricky thing about uncertain times is that it's unknown how long they will remain uncertain. A swift resolution to a geopolitical conflict or an economic report that shows a recession is unlikely can result in a quick correction for gold prices.

Most investors take a closer look at gold when significant uncertainty has been influencing asset prices for multiple weeks or months. These same investors rush to exit gold when the future outlook feels more certain.

Buying some gold each month with a dollar-cost averaging strategy lets you accumulate the precious metal during calm markets while boosting your exposure during more turbulent times.

Gold's lack of correlation to stocks is its strength

Portfolio diversification accounts for all possible future opportunities and risks. Stocks can produce the highest long-term returns, but they are also vulnerable to headwinds that act as tailwinds for gold.

The lack of correlation between gold prices and stock prices is valuable for asset allocation. Rising gold prices can minimize equity market losses during stock corrections, while a soaring stock market can make up for sluggish gold price movements.

The relationship between stocks and gold does not mean portfolio diversification ends with these two asset classes. Fixed-income investments like certificates of deposit and annuities — should also be considered as they offer stability and predictable income — something that gold and stocks lack.

Significant volatility for gold and equities can result in a sharp correction right when you want to tap into your nest egg. That's the worst-case scenario that can restrict your options later in retirement. While young investors usually pile into equities and gold, it makes sense to build up your fixed-income assets as you near retirement age. That way, you can live on cash during a market correction and wait for your assets to rebound.

Gold itself does not provide passive income

No matter how much gold appreciates, it will never provide passive income. Having investments that produce cash flow becomes more important as you get closer to retirement. If passive income sources like Social Security and dividends can cover your living expenses, you won't have to sell any of your investments.

Gold doesn't offer that assurance. Although you can sell some gold each year to fund your lifestyle, this plan is vulnerable to sharp corrections, which underscores the role of a gold IRA as a long-term investment strategy.

Investors who want a mix of gold and cash flow can invest in dividend-paying gold mining companies and dividend-paying gold exchange-traded funds. However, those investments leave shareholders exposed to gold miners’ financial performances, debt, mining sites and other factors. Gold miners are more correlated to the stock market than physical gold.

Using gold to diversify your portfolio

Gold has many properties that make it a desirable part of well-diversified portfolios. It can zig when the market zags, but you shouldn't make it a large position.

The common rule of thumb is to allocate 5% to 10% of your portfolio to alternative assets, including gold. This range offers enough exposure to gold to minimize stock losses during corrections without missing out on bullish economic cycles.

That percentage is also a reasonable target that you can build toward over time. There is no need to aggressively sell stocks and other assets just to reach the 5% to 10% threshold. Start where you are and gradually accumulate gold based on your long-term goals and risk tolerance.

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