Are soaring gold stocks a good addition to your investment portfolio?

Gold topped the charts in 2025 with big returns in a year filled with political and economic uncertainty.

Investors flock to gold for several reasons. Some use it as a form of insurance against inflation and a buffer against economic collapse. But dire outcomes usually develop over months or years, which also makes gold an interesting option for momentum investors because it has the tendency to go on long bull runs.

Before exploring gold’s merit as a momentum investment, it’s worth considering its effectiveness as a bulwark against bad times for Canadians.

It’s useful to start with a simple couch potato portfolio that puts 40 per cent of its assets in fixed income (3-month Canadian Treasuries) and 60 per cent in stocks split evenly between Canadian, U.S. and international stocks as tracked by the S&P/TSX Composite Index, the S&P 500 Index and the MSCI EAFE Index respectively.

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The portfolio generated a compound annual growth rate of 9.1 per cent from the end of 1970 through to the end of 2025 when rebalanced annually. (The returns herein are based on annual data from Libra Investment Management and Bloomberg. They include reinvested distributions but not fund fees, taxes, commissions or other trading costs. The results are provided in Canadian dollar terms.)

The golden portfolio tilts the couch potato portfolio so that 10 per cent of its money is invested in gold while the remaining 90 per cent is invested in the original portfolio. The tilt was beneficial because the golden portfolio climbed at an annual rate of 9.4 per cent, when rebalanced annually, from the end of 1970 to the end of 2025. In addition to slightly stronger returns, the golden portfolio was also slightly less volatile than the original.

However, adding a modest allocation to gold was probably not worth the extra complications – and costs – that come along with buying gold bullion. (Thankfully, it has become easy to find exchange-traded funds that track gold in recent years.)

Adding gold to momentum-based portfolios is more promising and the annual version of the hot potato portfolio provides a prime example.

The method behind the hot potato portfolio is straightforward but quite aggressive. (It’s something that shouldn’t be tried by novices or the risk-averse.) The idea is to move all of the portfolio’s money into the asset class that performed best over the prior 12 months.

In particular, today’s version of the hot potato portfolio picks the top performer over the prior 12 months from the four asset classes used by the couch potato portfolio. The hot potato fared well with average annual gains of 12.2 per cent from the end of 1970 to the end of 2025 when updated annually.

Adding gold as the fifth possible asset class to the hot potato yielded a big improvement. It lifted the portfolio’s average annual growth rate to 17.4 per cent from the end of 1970 to the end of 2025 when rebalanced annually.

The outsized gains were largely the result of gold going on multiyear hot streaks in the 1970s. For instance, gold was the top performing of the five asset classes from the start of 1972 through 1974 and from the start of 1977 through 1979. More recently, it fared the best in both 2024 and 2025. Time will tell if the third time is the charm.

If you look at periodic tables of annual asset class returns, you might start to see patterns because top performing classes sometimes have multiyear runs – or don’t revert to the mean immediately. While gold enjoyed hot streaks over various periods, so have U.S. stocks and international stocks.

Not to be left behind, Canadian stocks had a good run in the early-to-mid 2000s when the market rebounded from lows after the internet bubble burst. Hot streaks are a big reason why momentum-based portfolios have done well over the long term.

The big returns for the hot potato portfolios do, of course, come with more than a few caveats. The portfolios are quite aggressive and the annual versions tend to be much more volatile than the couch potato portfolios. They also tend to suffer from higher trading costs and, possibly, larger tax bills.

There is also no guarantee they’ll continue to perform as well as they have in the past. For instance, gold might behave differently because it has become more linked to the stock markets thanks to the rise of exchange-traded funds that track gold.

But gold currently has the momentum and there appears to be no sign of a letup in political and economic uncertainty as we head into 2026. It’ll be interesting to see how gold fares because there are no guarantees when it comes to the markets.

Norman Rothery, PhD, CFA, is the founder of StingyInvestor.com.

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