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Thanks to increasing stock market volatility and incoming leadership in Washington that some fear will drive inflation higher, gold is again at the top of many financial professionals' minds.

Following a year in which the SPDR Gold Trust ETF (GLD) gained nearly 27% and outperformed the S&P 500 Index, financial advisors are weighing their options regarding new allocations to the precious metal.

“Investors should consider precious metal exposure in their portfolios for diversification,” said Corey Voorman, president of Voorman Investment Counsel in Plymouth, Michigan.

Referencing multiple upward pressures on the price of gold, Voorman cites the strength of gold through the aggressive interest rate hike cycle in 2022 and 2023.

“Gold is a non-yielding asset so, typically, when rates rise it places downward pressure on the spot price of gold,” he said. “It passed the hiking regime with flying colors buoyed by increased central bank demand across the world.”

Gold Rally Will Be Tested

Stephen Kolano, chief investment officer at Integrated Partners in Waltham, Massachusetts, typically uses precious metals as a proxy for real interest rates in relation to future inflation.

“Gold and silver tend to perform well when expectations for inflation are increasing, and markets are concerned interest rates are not rising fast enough to slow the rate of increasing inflation,” he said. “In the last few years, you’ve seen this relationship hold up well.”

Nicholas Codola, senior portfolio manager at Brinker Capital Investments in Berwyn, Pennsylvania., sees the pros and cons of allocating to gold in the current environment.

On the positive side, he described gold as a “highly volatile asset with a low correlation to stocks and bonds.” Codola also sees “tailwinds” in the form of global central banks buying.

Codola is cautious about the recent strong performance that “could suggest a pullback and positive real interest rates tend to challenge gold.”

At more than $2,600 an ounce, the yellow metal is likely to hold steady for the near term, according to Taylor Krystkowiak, investment strategist at Greenwich, Connecticut-based Themes ETFs.

“Typically, what we’ve seen is once gold has had a big runup, it will continue to consolidate and move sideways, making a new floor,” he said. “I think we’re seeing the early stages of that.”

As a specific portfolio position, Pamela Horack, founder of Your Financial Mom in Lake Wylie, South Carolina, said gold often appeals to risk-averse investors.

“What I have found is that, because precious metals do not pay interest or dividends and there may be holding costs, they are not an appropriate fit for clients with larger fixed income portfolios,” she said. “Precious metals can actually be a drag on their returns and do not provide any income.”