Gold’s safe haven effect has ‘faded’ during periods of high market volatility, according to research from the University of Stirling.

The study, titled ‘The diminishing lustre: Gold’s market volatility and the fading safe haven effect’, tracked gold prices and market behaviour over 37 years from January 1987 to May 2024, covering several major financial crises.

Researchers from both Stirling and Abdullah Alsalem University of Kuwait said the gold market has experienced two distinct periods. The first covered a stable market from 1980 to 2005, before a volatile period between 2006 to 2024.

They said gold’s hedge effectiveness has declined significantly during the volatile period, with the precious metal’s correlation with stocks turning positive in crises after 2005. 

“We are currently seeing that the price of gold remains high and the price of stocks are also high – which is not the pattern we would usually see. The general safe haven argument is that stocks and gold move in opposite directions, but they are moving together,” said co-author David McMillan, professor of finance and head of accounting and finance at Stirling Business School.

“Our analysis found that gold started to lose its position as a safe haven during volatile periods,” said McMillan. “Platinum is the only precious metal to show a statistically significant safe haven role during extreme market shocks in the stable and volatile periods.

“Gold exhibits a similar risk pattern to the S&P 500 index, a sign that investors are treating gold as ‘just’ another asset,” added co-author Hussain Faraj, a former PhD student at Stirling Business School.

“Another indicator of this is that we are seeing an increase in demand through ETFs, which historically have not included gold.”

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The study argued the gold market “fluctuated notably” after 2005, with prices surging to historic highs and not declining as expected. By contrast, platinum showed less volatility.

 “Gold is well known as a safe haven but it does exhibit high levels of volatility, and has experienced long periods in the wilderness,” said Laith Khalaf, head of investment analysis at AJ Bell, reacting to the study.  

“It can still work as a diversifier alongside equities and bonds, because it dances to a different beat, but investors should seek no more than 5% to 10% of their portfolio invested in gold.”

Meanwhile, Nedgroup Investments portfolio manager Madhushree Agarwal said gold is still an effective diversifier.

“Gold absolutely has a place in our portfolios,” she said. “For us, gold acts as both a portfolio diversifier and a hedge against stagflation, as well as those rare but high-impact shocks that can unsettle both equities and bonds at the same time.

“In short, gold sits at the intersection of protection and opportunity, giving our clients reassurance when markets get stormy and a steady anchor through choppy volatility.

“Our philosophy hasn’t shifted – gold is not an asset we want for growth or income, but for protection and diversification. That role is most cleanly achieved through physical exposure.”

Richard Weiss, senior vice president and chief investment officer of multi-asset strategies at American Century Investments, added: “We have found that commodities and specifically, gold can be an excellent diversifier to an otherwise well-diversified portfolio of stocks and bonds.

“Our extensive research in this area has uncovered additional key findings that we employ in commodity (and thus, gold) allocations.

“Buying and holding broad commodity exposure over the longer term tends to be very costly to a multi asset portfolio for several reasons. Chief among them is that commodity returns are highly episodic and tend to be highly correlated with inflation. Therefore, we have found that tactical, rather than strategic (i.e., buy and hold) exposure is optimal.”