The dilemma of correlation: Why do investors still hold both gold and stocks simultaneously

In the ongoing debate over gold as an investment asset, correlation is the key to unlocking the mystery. While stocks outperform in long-term wealth accumulation, many investors still allocate a portion of their assets to gold. This is no coincidence but stems from the complex correlation relationship between gold and stocks. According to research and analysis by crypto market commentator Bill Qian, the correlation between gold and the S&P 500 has risen from historically low levels to current highs. Yet, this very change explains why gold remains an indispensable part of modern investment portfolios.

Data Reveals the Dilemma: Why Is Gold’s Performance Less Stable Than Stocks?

Since President Richard Nixon ended the gold standard in 1971, market behavior has taken a markedly different path. The S&P 500 has demonstrated significant strength over the past 55 years—delivering positive returns in 44 of those years—meaning investors experienced capital growth approximately 80% of the time. In contrast, gold’s performance has been more volatile: it grew in 34 years but declined in 21, resulting in positive returns in about 60% of years and negative returns in 40%.

From a behavioral finance perspective, this disparity creates entirely different psychological investment experiences. Studies show that investors feel the pain of losses more acutely than the pleasure of equivalent gains. As a result, gold holders who face frequent downturns endure greater psychological stress. However, this seemingly “disadvantageous” trait actually conceals gold’s true investment value.

Historical Trajectory of Correlation: From Independence to Synchronization, Then to Divergence

Currently, the rolling annual correlation between gold and the S&P 500 is approximately 0.82. This high level reflects the prevailing market narrative—that investors are simultaneously buying quality stocks and gold to hedge against fiat currency devaluation. But this synchronized behavior is a recent phenomenon.

Long-term quantitative analysis reveals a more complex truth: over extended market cycles, stock price changes explain only about 24% of gold’s volatility. This indicates that gold possesses an independent long-term price-driving mechanism, with its correlation to the stock market being far less tight than surface-level correlation figures suggest. This independence is precisely what makes gold attractive—it does not blindly follow stock fluctuations. That’s also why investment legends like Ray Dalio recommend allocating 5% to 15% of a portfolio to gold as part of an “enduring asset allocation” strategy.

Correlation Reversal During Crises: Gold’s True Defensive Value

Gold’s key characteristics are fully demonstrated during severe market downturns. Since 1971, in years when the S&P 500 declined, gold outperformed stocks in 88% of those years. The most notable example is the 2008 global financial crisis—while equities suffered heavy losses, gold rose by 21%, exhibiting a perfect inverse correlation.

This reversal of correlation during crises is no coincidence; it embodies gold’s role as a tail-risk hedge. When the financial system faces severe stress, demand for safe assets surges. Gold’s historical stability and safe-haven qualities make it the preferred choice. This trait underscores gold’s strategic importance in diversified portfolios—it is not meant to outperform stocks but to provide protection when markets spiral out of control.

Redefining Gold’s Role in the Portfolio

Data clearly shows that although gold underperforms stocks in most years, its low correlation and “inverse return” during crises make it an essential component of professional portfolios. The dynamic shift in correlation—from historically low levels to the current 0.82—demonstrates that the interaction between gold and stocks continues to evolve across different market environments.

For this reason, both institutional and individual investors continue to retain gold allocations. This is not based on short-term return expectations but on rational long-term risk management. In an era of ongoing global economic uncertainty, the combination of gold and stocks offers a time-tested protective mechanism. This is why savvy investors never abandon gold—the changing correlation only reinforces the validity of this strategy.