Is the traditional stock-bond portfolio frequently failing? Goldman Sachs suggests: long-term overweight in gold, underweight in oil
During a period when credibility in the United States is questioned and inflation risks are rising, the market has repeatedly experienced simultaneous declines in both stocks and bonds. When the stock-bond combination fails, gold and oil have never simultaneously been absent from positive returns. Goldman Sachs' research report points out that gold and oil futures have become key hedging tools for long-term investment portfolios. By increasing allocations to gold and oil, the annualized volatility can be reduced from nearly 10% to 7%, while maintaining a historical average return rate of 8.7%
In the current situation where the traditional 60/40 stock-bond portfolio repeatedly fails, how should investors seek a safe haven?
According to news from the Chasing Wind Trading Desk, Goldman Sachs analysts provided an answer in their latest research report, stating that for long-term investment portfolios (over 5 years), investors should overweight gold and underweight oil as key hedging tools.
When inflation shocks occur, both stocks and bonds may experience negative real returns simultaneously, while oil and gold often do not disappoint during such stock-bond double hits. Goldman Sachs stated that by adding gold and enhanced oil futures, the annualized volatility of the traditional 60/40 portfolio can be reduced from nearly 10% to 7%, while maintaining a historical average return of 8.7%.
Goldman Sachs presented two core viewpoints:
First, in the long run, allocating gold and enhanced oil futures can effectively reduce portfolio risk. Gold and oil can withstand the two main types of inflation shocks that have the greatest impact on stock-bond portfolio returns. Gold can hedge against losses in central bank and fiscal credibility, while oil typically guards against inflation shocks caused by supply issues. Historical data shows that in any 12-month period, when the real returns of both stocks and bonds are negative, at least one of gold or oil can provide positive real returns.
Second, Goldman Sachs currently recommends overweighting gold and underweighting oil in long-term investment portfolios. Specifically, the overweighting of gold is mainly due to two considerations: first, the high risk to the credibility of the U.S. system, such as fiscal expansion and potential pressure on the independence of the Federal Reserve; second, the continuous growth in demand for gold from central banks around the world, which will strongly support gold prices. The underweighting of oil is due to high idle capacity reducing the risk of oil shortages in 2025-2026, as well as favorable supply growth prospects for non-OPEC countries (excluding Russia).
Traditional stock-bond portfolios frequently fail, gold and oil become "weapons" against inflation
Recently, the U.S. bond market has repeatedly lost its safe-haven function, failing to provide protection during stock market declines. When tariff escalations in April raised concerns about economic governance, the yield on 30-year U.S. Treasuries fell in tandem with U.S. stocks; in May, renewed doubts about fiscal sustainability led to a spike in long-term borrowing costs, exacerbating the stock-bond double hit.
Goldman Sachs' report pointed out that historical data shows that the key challenge facing stock-bond portfolios is a lack of sufficient diversification. When inflation shocks occur, whether due to damage to U.S. institutional credibility (such as the fiscal expansion and subordination of the Federal Reserve in the 1970s leading to uncontrolled inflation) or negative commodity supply shocks (as seen in 2022), both stock and bond assets may experience negative real returns simultaneously.
During times of stock-bond double hits, gold and oil assets have never simultaneously been absent from positive returns.
Goldman Sachs' research data shows that since 1970, whenever the 12-month real returns of stocks and bonds are both negative, at least one of gold or crude oil can provide positive returns. They recommend overweighting gold and underweighting oil in long-term investment portfolios.
The firm noted that within a mean-variance optimization framework, adding gold can reduce the annualized volatility of a 60/40 stock-bond portfolio from 10% to 8%, while adding enhanced crude oil futures can further compress it to below 7%, while maintaining an 8.7% historical average return. **
Gold: The Best Choice to Address Institutional Credibility Crisis
Goldman Sachs recommends an overweight position in gold primarily for two reasons: first, the credibility of the U.S. system is facing high risks, such as fiscal expansion and potential pressure on the independence of the Federal Reserve; second, the continued growth in demand for gold from central banks around the world, which will strongly support gold prices.
1. Increased Risk to U.S. Institutional Credibility: The ratio of U.S. debt to GDP continues to rise, coupled with the potential for a new round of fiscal easing policies, raising sustainability concerns. Additionally, recent comments from the president on social media have raised doubts about the independence of the Federal Reserve. Historical data shows that a decrease in central bank independence is usually accompanied by higher inflation levels.
2. Sustained Central Bank Demand: Since the Russian central bank's reserves were frozen in 2022, demand for gold from central banks has increased fivefold, particularly from emerging market central banks. Goldman Sachs estimates that central banks will continue to rapidly accumulate gold for at least the next three years to reach target reserve levels.
Goldman Sachs maintains its gold price forecast: year-end target price of $3,700 per ounce, mid-2026 target price of $4,000 per ounce.
Oil: Underweight but Still Need to Maintain Positive Allocation
Goldman Sachs recommends an underweight position in oil futures in long-term investment portfolios, primarily because the risk of a sustained large-scale oil shortage in 2025-2026 is relatively low. This reflects high spare capacity, OPEC+'s recent willingness to increase production, and strong performance in non-OPEC (excluding Russia) supply growth over the past two years.
Nevertheless, Goldman Sachs still advises maintaining a positive allocation to oil, for reasons including:
Extreme energy disruption shocks (such as in 1974 or 2022) are difficult to predict
Non-OPEC supply growth is expected to slow sharply after 2028, increasing the risk of future oil inflation shocks
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