Gold allocation: Pension funds are holding up to 5%. How much should retail investors keep in their portfolio?

Gold has received increased attention from some pension funds as they reassess portfolio construction against a backdrop of geopolitical tensions, inflation shocks and a less reliable equity-bond correlation, according to a new World Gold Council report.

The report, Gold in Pension Funds: Case Studies, looks at pension funds globally that already allocate to gold. It says their rationale is not typically framed as a simple directional view on the gold price. Instead, they consider gold in the context of broader portfolio challenges and objectives, including funded status, diversification in periods of market stress, inflation risk, liquidity, and the potential to affect risk-adjusted returns at the total portfolio level.

How pension funds are allocating to gold

Pensioenfonds PDN in the Netherlands, with €7.7 billion in assets, began investing in gold in October 2020 and completed its final purchase in April 2021 to reach a 5% target.

According to DPS, the investment followed an asset and liability management study in 2020 that identified diversification benefits and the potential to reduce portfolio risk. The study also indicated lower expected portfolio risk without a reduction in expected return.

PDN funded the investment in physical gold through a 10% reduction in its exposure to government bonds. Half of the proceeds were allocated to gold and the remainder to equities, real estate and infrastructure.

Fairfax County Employee Retirement Systems in the US, with around US$6.2 billion in assets, has a 3% allocation to gold. The allocation is part of its real asset exposure and is attained through futures.

The funds said the investment, initiated in 2020, was undertaken in response to the pandemic and associated monetary stimulus, which heightened concerns about inflation. Gold also serves an inflation-hedging role and provides diversification within the portfolio.

In the UK, Now: Pensions Master Trust, with more than 2.5 million members and over £8 billion in assets under management, made its first investment into gold in April 2021.

The investment is around 2% of total assets and is accessed through futures within the alternatives sleeve of the Now Pensions growth fund.

In Australia, NGS Super has maintained an allocation to gold of 3% since June 2020. The fund says its priority is building resilient portfolios that can navigate different market environments, including heightened volatility and equity downturns.

Gold as a portfolio diversifier

The WGC report says high-quality government bonds have traditionally fulfilled the role of a diversifier in investment portfolios. In recent years, however, the correlation between bonds and equities has increased significantly, raising questions about diversification and portfolio construction.

Gold is one asset that certain pension funds consider alongside equities and bonds in broad-based portfolios.

The report says gold is a liquid asset with historically low-to-negative correlation to equities during periods of market stress. It also notes that gold has historically rallied in periods of high inflation, although the extent to which it performs that role can depend on the period examined and the measure used.

What should investors keep in gold?

“When financial markets correct sharply, gold has historically shown the ability to hold value better. This difference in behaviour helps reduce overall portfolio volatility and smooth the investment journey,” said Shweta Shastri, a Certified Financial Planner (CFP).

“Gold should account for around 10% of a portfolio. Historically, this has been considered a balanced allocation, enough to protect volatility without compromising long-term wealth creation,” Shastri said.

She noted that allocating more than 10% to gold does not proportionately improve portfolio stability but can dilute long-term returns.

“Historically, long-term wealth creation has largely come from assets like equity. Allocating too much to gold may slow down compounding,” she said.

Gold and Silver ETFs

“Generally, around 15–20% of a portfolio may be allocated to Gold and Silver ETFs,” Dondapati said.

Within this range, conservative investors might assign a relatively larger share to gold, whereas aggressive investors may opt for a smaller allocation to Gold ETFs.

Investors should approach these investments with a long-term perspective rather than aiming for short-term gains. Additionally, investing gradually through staggered contributions is preferable to making a single lump-sum investment.

The WGC says the pension-fund case studies are not intended to suggest that all pension funds should hold the same allocation or that gold serves the same role in every portfolio.

Instead, the case studies show how pension funds have integrated gold in different ways depending on their governance structure, risk budget, funding position and investment philosophy.