You’ve probably heard this said a thousand times. Gold protects you when markets fall. Gold keeps up with inflation. Gold is the ultimate safe haven.

But is it actually true? Or is it just something people repeat because it sounds right?

The honest answer is that it’s mostly true, but with a few important nuances. Let’s look at what the evidence actually shows.

Gold When Stock Markets Crash

This is where gold’s reputation is strongest, and it’s also where the evidence is most convincing.

Over the past 50 years, data from BullionVault shows that when the S&P 500 was lower than it had been five years earlier, gold showed a gain from that same five-year starting point 98% of the time. That’s a remarkable track record. Not perfect, but about as close to reliable as you’ll find in investing.

Let’s look at some of the major events:

During the 2008 financial crisis, the S&P 500 fell 37% for the year. Gold finished 2008 up nearly 6%. While everything else was being sold in a panic, gold held firm and actually delivered a positive return.

When COVID-19 hit in early 2020 and global markets went into freefall, gold dipped briefly in the initial liquidity crunch (as investors sold everything to raise cash), but quickly recovered. By the end of 2020, gold was up around 25% for the year, while markets were still finding their feet.

During the Russia-Ukraine crisis starting in 2022, equities struggled. The S&P 500 fell roughly 20% and the Nasdaq dropped over 30%. Gold held relatively steady through the year, finishing close to flat while everything around it was falling apart.

Research from Sprott shows that across seven major crisis periods since 2007, gold has delivered an average return of 26%, compared to an average loss of 4% for the S&P 500 during those same windows.

That’s the core of gold’s value proposition. It tends to do well precisely when your other investments are doing badly. In portfolio terms, that’s incredibly powerful.

The Small Print on Stock Market Crashes

It would be misleading to suggest gold always goes up the moment stocks go down. It doesn’t work quite that neatly.

In the very short term, during sudden market shocks, gold can actually fall alongside equities. This happened briefly in March 2020 and during the initial stages of the 2008 crisis. When panic sets in and investors need to raise cash urgently, they sell whatever is liquid, and gold is very liquid. So it can get caught up in the initial wave of selling.

But here’s the key point: those dips tend to be shallow and short-lived. Gold typically finds its floor much faster than equities and recovers sooner. The pattern, time and again, is a brief dip followed by a strong recovery as gold’s safe haven qualities reassert themselves.

The other thing to understand is that gold doesn’t perfectly mirror the inverse of the stock market. The correlation between gold and equities is low, but it’s not consistently negative. In calm markets, gold and stocks can rise together quite happily. It’s specifically during periods of stress and uncertainty that gold’s negative correlation kicks in most strongly.

That’s actually ideal for a hedge. You don’t want an asset that drags on your portfolio during the good times. You want one that stays out of the way when things are going well and steps up when things go wrong. Gold does exactly that.

Gold as an Inflation Hedge

This is the claim that gets a bit more complicated.

Over long periods, gold has absolutely kept pace with inflation and then some. An ounce of gold has maintained its purchasing power across centuries in a way that no fiat currency can match. The old example is that an ounce of gold in Roman times could buy a fine toga, and today it can buy a decent suit. It’s a simplification, but the point holds.

In the UK specifically, gold has comfortably outpaced inflation over the past decade. UK CPI inflation has averaged somewhere around 3% to 4% per year over the last 10 years, including the spike to nearly 11% in late 2022. Over that same period, gold in sterling has delivered annualised returns of roughly 17% to 18%. That’s not just beating inflation. That’s crushing it.

But the relationship between gold and inflation isn’t always immediate or perfectly correlated. There have been periods where inflation was rising and gold was flat or even down. 2022 is a good example. UK inflation hit nearly 8% for the year, yet gold in dollar terms finished roughly flat. The reason? Rising interest rates. When central banks hike rates aggressively to fight inflation, the opportunity cost of holding gold (which pays no yield) goes up, and that can hold prices back in the short term.

What’s interesting, though, is that gold often moves ahead of inflation rather than alongside it. It jumped significantly in 2020 before the big inflation wave hit in 2021 and 2022, because investors were already anticipating that massive government stimulus would eventually feed through into higher prices. Gold was pricing in tomorrow’s inflation while the official numbers were still catching up.

So rather than thinking of gold as something that tracks inflation month by month, it’s better to think of it as a long-term store of value that protects your purchasing power over years and decades. On that measure, the evidence is very strong.

Why Gold Works as a Hedge

There are some fundamental reasons why gold behaves this way, and understanding them helps explain why the pattern is likely to continue.

Gold has no counterparty risk. Unlike stocks, bonds, or bank deposits, gold doesn’t depend on any company, government, or institution honouring its obligations. A stock can go to zero if the company fails. A bond can default. Cash in the bank is only as safe as the bank itself. Gold is just gold. It sits there and holds its value regardless of what’s happening in the financial system around it.

Gold supply is limited. You can’t print more gold the way governments print more money. Global mine production adds roughly 1.5% to the total above-ground supply each year, which is far less than the rate at which most currencies expand their money supply. This scarcity underpins gold’s value over time.

Gold has universal demand. Central banks, institutional investors, jewellers, and private individuals all want gold, and that demand spans every continent and every culture. When one source of demand weakens, another tends to pick up the slack.

Gold thrives on uncertainty. When confidence in the financial system, in governments, or in the global outlook wavers, people instinctively move toward tangible, trusted assets. Gold has been that asset for thousands of years, and there’s no sign of that changing.

What Gold Won’t Do

It’s worth being clear about what gold isn’t. It’s not a guaranteed profit generator. There have been extended periods, most notably the 1990s and parts of the early 2010s, where gold went sideways or declined while other assets performed well.

Gold doesn’t pay income. There are no dividends, no interest, and no rental yield. If you’re looking for regular cash flow from your investments, gold won’t provide it.

And gold can be volatile in the short term. Daily and weekly price swings of several percent are not unusual, especially recently. If you’re watching the price every day, it can feel uncomfortable. Gold rewards patience, not speculation.

How Much Gold Should You Hold?

Most financial commentators suggest allocating somewhere between 5% and 20% of your portfolio to gold, depending on your risk tolerance and outlook.

At the lower end, 5% to 10% acts as a form of insurance. It won’t transform your returns in the good times, but it’ll cushion the blow during the bad times. At the higher end, 15% to 20% is a more assertive positioning that reflects a belief that economic uncertainty and inflationary pressures are likely to persist.

Some major institutions have been increasing their recommended gold allocations recently. Morgan Stanley, for instance, suggested a 20% allocation for 2025, which is significantly higher than the traditional recommendation. That’s partly a reflection of how well gold has performed, but also an acknowledgement that the global economic environment has become structurally more uncertain.

For UK investors, the tax advantages of holding CGT-exempt gold coins like Britannias and Sovereigns make the case for gold even more compelling, since any gains on these coins are completely free of Capital Gains Tax.

The Bottom Line

Gold’s track record as a hedge against both stock market losses and inflation isn’t perfect, and anyone who tells you otherwise is oversimplifying things. There are short-term exceptions, nuances in timing, and periods where gold underperforms.

But over the medium to long term, the evidence is overwhelming. Gold has consistently delivered positive returns during equity market crises, averaging 26% across major crisis periods since 2007 while stocks fell. And gold has comprehensively outpaced inflation over every meaningful time horizon, particularly for UK investors where sterling weakness has provided an additional tailwind.

No single asset can protect you from everything. But if you’re looking for something that has a genuine, proven ability to hold its value when other parts of your portfolio are under pressure, gold is about as good as it gets.

At SMP Bullion, we help UK investors build gold holdings as part of a long-term wealth protection strategy. Whether you’re looking to start small or make a significant addition to your portfolio, we offer competitive prices on a wide range of gold coins and bars from trusted refiners and mints.

Past performance is not a reliable indicator of future results. This article is for informational purposes only and does not constitute financial advice.