Gold’s optimal allocation

What's the optimal gold allocation in a stock/bond portfolio? The data from 1970-2024 says ~14%.

Incrementum AG ran a gold allocation sweep on a stock/bond portfolio (S&P 500 TR and US 10Y TR), using data from Robert Shiller and LSEG. Gold was added in 2% steps from 0% to 30%, then in 10% steps up to 60%.

You can see in the charts below what the numbers show:

📉 Volatility is U-shaped. It starts at 8.28% with no gold, bottoms at 7.81% with 14% gold, then climbs. By 30% gold you're back to roughly the starting volatility (8.51%), and at 60% it reaches 12.25%.

📈 Return rises with gold, but with diminishing returns. Performance goes from 9.37% p.a. at 0% gold to 9.59% at 14%, and peaks at 9.75% at 40% gold. Beyond that it fades.

📊 Sharpe ratio peaks at 0.60 across the 14-18% range, versus 0.54 with no gold. A flat plateau like this is more useful than a single magic number.

🛡️ Max drawdown is minimized at 20% gold (-21.97%), compared with -27.00% for the traditional portfolio. That's roughly 5 percentage points of downside protection.

Why it works: Gold's low and unstable correlation to both equities and bonds makes it a genuine diversifier. Its biggest contribution comes when stocks and bonds fall together, as in the 1970s inflation regime, which is exactly when a 60/40 portfolio loses its hedge.

Takeaways:

1️⃣ A 14% allocation improved return, volatility, drawdown and Sharpe ratio simultaneously. That's rare.

2️⃣ The optimum is a zone (roughly 10-20%), not a point. Reasonable people can land anywhere in it depending on their objective: volatility, drawdown or Sharpe.

3️⃣ More isn't better. Beyond ~30%, the portfolio takes on more risk than it started with.

Caveats worth stating: this is a backtest over a period that includes the 1970s inflation shock and gold's repricing after the end of Bretton Woods. Gold has no yield, and the optimum shifts with the sample window. Treat 14% as an empirical reference point rather than a forecast. This is NOT financial advice.

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