What Kind of Asset Is Gold?

First, let's clear up a misconception. Stocks share out the money a company earns as dividends, and bonds pay interest. But gold? It gives you nothing. A bar of gold locked in a vault doesn't multiply. In fact, it can cost you money to hold (vault fees, insurance, ETF management fees).

So where does gold's value come from? From its 'scarcity' and the fact that it is 'no one's debt.' Stocks, bonds, and deposits are ultimately promises that someone (a company, a government, a bank) has to repay. If that counterparty collapses, they become worthless paper. Gold, by contrast, does not depend on any particular party's credit. The World Gold Council describes gold as 'an asset that is no one's liability, carries no credit risk, and is scarce.'

That's why gold is closer to 'an asset that tries to protect value' than 'an asset that creates returns.' You need to understand this difference so you don't misread gold.

The most famous scene in gold's history is January 1980. Two oil shocks, the Soviet invasion of Afghanistan, the Iran hostage crisis, and double-digit inflation all piled up, and the price of gold soared to about $850 per ounce. Just ten years earlier it had been around $35 (the fixed price under the gold standard) — a stunning surge.

The problem was what came next. When Fed Chair Volcker aggressively raised interest rates to tame inflation, gold — which pays no interest — rapidly lost its appeal. From the 1980 peak to 1982, gold fell roughly -57% (about -57% per the data), and by around 1999 it had drifted down to about $255 per ounce.

What's even more striking is the recovery period. In nominal terms, it took about 28 years — roughly to around 2008 — to surpass the 1980 peak (about $850) again. Some analyses note that the 'real' peak, adjusted for inflation, was not reclaimed until much later. This is exactly why the claim that 'gold is always safe' is dangerous.

People often say 'gold is an inflation hedge.' Half of that is true, and the other half calls for caution.

Over the long run, since the end of the gold standard in 1971, gold has risen at roughly 7–8% per year (CAGR, with variation across sources), outpacing U.S. and global price indexes. In that sense its role as a 'store of value' that has preserved purchasing power over thousands of years is somewhat valid.

But as a 'short-term inflation shield' it often disappoints. For example, from 1980 to 1984, inflation ran at about 6% per year, yet gold investors on average lost money. Conversely, when extreme and unexpected inflation and geopolitical crises pile up, as in the 1970s, it can surge sharply. In other words, gold is less 'an asset that steadily tracks small increases in prices' and more 'an asset that spikes when panic strikes.'

One more thing. Gold is usually priced in dollars. When a Korean investor invests in gold (or a gold ETF) in won, the return depends not only on the gold price itself but also on the won/dollar exchange rate. The exchange rate can help at times and hold you back at others.

Returns are ambiguous and the drawdown is large — so why do so many investors hold a little gold? The answer is 'diversification.'

Gold tends to have a low correlation with stocks, and especially during crisis phases when stocks swing violently, it has tended to hold up or even rise. So it is often held in the hope that it will act as a 'cushion' that dampens the overall portfolio's swings (volatility) and maximum drawdown. Recently, the trend of various countries' central banks buying up gold to reduce their reliance on the dollar has also supported the gold price.

To sum up, gold is less 'the leading character who makes you rich on its own' and more 'a supporting actor who stabilizes the whole team.' But even a supporting actor can be expensive at times (at a peak), so when and how much you hold greatly changes the outcome. The most accurate way to see how mixing in gold changed the maximum drawdown and drawdown (loss) duration over actual historical periods is to check it directly with a simulation.