Key Takeaways
- Based on Morningstar categories’ behavior, it is becoming harder for investors to diversify their portfolios in 2025.
- Over the last 20 years, the LBMA Gold Price Index and the Morningstar Global Markets Index show a positive 0.14 correlation rate.
- Historically, gold’s true diversification value has emerged during crisis episodes, such as in 2008 and 2020.
For decades, investors have treated gold as a timeless insurance policy—an asset expected to shine when equities falter. The metal’s reputation as a hedge against inflation, market stress, and geopolitical shocks is deeply ingrained. Yet, a closer look at the data reveals that over the long run, gold and global equities have exhibited a null to low positive correlation.
Over the last 20 years, the LBMA Gold Price Index and the Morningstar Global Markets Index show a positive 0.14 correlation rate. This means that while gold has often moved independently of stocks, the relationship has not been consistently negative -- at times, rising when stocks rise, for example.
How Correlation Works and Why it Matters
The work of Nobel laureate Harry Markowitz on modern portfolio theory looked at why the more a financial portfolio is composed of securities of different properties, such as sectors or style biases, the more risk is lowered. This is called “diversification.”
Diversification is a basic yet smart investment practice, the idea being that when one part of your portfolio is falling, a rise in another part can balance out total returns.
How much of a portfolio should be devoted to equities, bonds, or other assets depends on correlation, a measure of how closely two assets track each other’s moves. This is expressed as a number between negative 1 and positive 1.
A coefficient of 0 indicates that there is no correlation between the two funds. A coefficient of 1 indicates that there is a perfect positive correlation, which means that the two instruments move together: if one rises by 10%, the other does too, and vice versa. Obviously, in the case of perfect negative correlation, or negative 1, the ratio is inverse: If the first rises by 10%, the second loses 10%.
Gold’s Rally Raises Questions for Investors
Gold’s 2025 rally has been nothing short of remarkable, despite its most recent pullback from all-time records. After climbing more than 50% year-to-date and rising above $4,000 per ounce, the precious metal has lived up to its reputation as an in-demand asset in turbulent times.
Whenever significant geopolitical events have occurred, the price of gold has risen immediately, with high trading volumes. But with prices still near record levels, the question now is whether gold still offers value as a portfolio diversifier.
Gold Remains an Effective Hedge in Difficult Times
While gold’s 20-year correlation with stocks is positive, it is very low. “As a standalone asset class and removing currency effects, precious metals continue to have a low correlation with traditional assets and can offer diversification within investor portfolios. However, it is also important to consider the risks and increasingly rich valuations of this asset class,” says Nicolò Bragazza, associate portfolio manager at Morningstar Wealth.
Therefore, investors should always ensure that the fundamentals of gold as an asset class support its role as a ‘diversifier’ within the portfolio.
Looking at the historical relationship between the gold price and equity markets, it is evident that during periods of relative market calm, gold and stocks frequently rise together, driven by liquidity and growth optimism. Gold’s true diversification value, however, has emerged during crisis episodes, such as the 2008 financial crisis and the COVID-19 market shock in early 2020.
For long-term investors, then, gold remains a compelling insurance policy. Its historically low correlation with equities and bonds continues to make it a stabilizing force in diversified portfolios.
In his latest monthly letter, UBS chief investment officer Mark Haefele writes that the bank maintains an “attractive view on gold,” as it has “outperformed all major equity and bond indices this year, reflecting in part its portfolio role as a hedge against economic, political, and geopolitical risk.” At the same time, the precious metal’s low correlation with equities and bonds, especially during periods of market stress, also “makes it a valuable diversifier.” Haefele recommends a mid-single-digit percentage allocation.
At the same time, Ray Dalio, founder of Bridgewater Associates, who recently spoke at the Greenwich Economic Forum, puts the recommended weighting far higher than that, urging investors to allocate around 15% of their portfolios to gold.
In 2025, Gold Has Not Been a Good Diversifier
In 2025, however, the Morningstar category of funds investing in precious metals, including gold, showed positive correlations in euros compared to most other categories, reversing the trend in both 2023 and 2024. In particular, the precious metals category appears to have increased its correlations, especially with risky categories and with those whose underlying assets are denominated in US dollars.
“This effect is partly due to the conversion of returns into euros,” explains Morningstar’s Bragazza. “In recent years, gold’s correlation with global equity markets has remained positive when measured over a 36-month horizon,” he says. “However, correlations can be quite unstable over time and are difficult to predict.”
Correlation Between Asset Classes Is Increasing
Effective asset allocation, such as dividing a portfolio between bonds and stocks, is used to enhance returns when markets are rising and protect capital and reduce risk when they are falling. Diversification is a vital part of investing success, but there are signs that true diversification is getting harder to achieve. We have looked at 14 major Morningstar Categories over three different time horizons: in the first nine months of 2025, in 2024, and in 2023.
The correlation rates between the various asset classes since the beginning of the year have increased significantly compared to the previous years, especially for certain categories: The greener the box, the higher the correlation. Conversely, the more the box tends to red, the more the coefficient will be negative.
This implies that it has been harder for investors to diversify during phases of high volatility such as the ones seen this year, triggered by US trade tariffs, sticky inflation, and geopolitical tensions in Eastern Europe and the Middle East.
Is Gold Still a Good Diversifier?
Correlations between precious metal funds and other categories appear to become more positive over time, implying a reduced benefit of diversification. While in 2023, 7 out of 14 correlations were negative, that number remained broadly stable at 8 negative correlations in 2024-- in the first nine months of this year, no negative correlations remain, however.
Despite gold’s multi-decade track record of low correlation, for now, fund products exposed to gold seem to have lost their natural role as portfolio diversifiers.
