The Structural Case of Gold in a Stagflationary Environment

The Condition That Matters Most

Gold does not perform equally across all market environments. Its strongest periods of price appreciation have coincided with one condition in particular: negative real interest rates. When inflation runs above the nominal rate available on risk-free assets, the opportunity cost of holding gold falls to zero or below. In that environment, gold retains purchasing power while cash erodes it.

That condition is present in Australia today. The March 2026 CPI print confirmed headline inflation at 4.6 per cent annually. Term deposit rates from the major banks are sitting between 4.0 and 4.5 per cent. Before tax, the real return on a term deposit is negative. After tax, the erosion is more pronounced.

The Reserve Bank of Australia is widely expected to raise the cash rate at its May 2026 board meeting. A third consecutive rate hike would leave headline inflation running materially above the policy rate. The conditions that have historically supported gold prices are not theoretical in the current environment. They are reflected in the data.

"Gold tends to perform well in times when real interest rates are negative. We have a positive view towards gold's price potential over the medium term." Emanuel Datt, Chief Investment Officer, Datt Capital

A Structural View, Not a Tactical One

It is important to distinguish between a tactical trade on gold and a structural position. A tactical view says: buy gold now because of a short-term price catalyst. A structural view says: the conditions underpinning gold's performance are durable and unlikely to reverse quickly.

Datt Capital holds the latter view. The conditions supporting gold are not limited to the current CPI print or a single RBA decision. They reflect a broader environment in which monetary stimulus has been the dominant policy response to successive economic shocks, and in which the accumulated effect of that stimulus is now visible in persistent inflation. The RBA's rate hiking cycle and which sectors it rewards provides additional context on how the current policy environment is reshaping the investment landscape.

"We anticipate that markets will continue to be buoyed by monetary stimulus and accordingly believe this will be positive for hard assets such as gold over time." says Emanuel.

Hard assets, including gold, tend to preserve value in environments where fiat currency purchasing power is being diluted by sustained monetary expansion. The mechanism is well established. What is less predictable is timing, which is why the view is expressed over the medium term rather than anchored to a specific price target or event.

Near-Term Volatility Is Part of the Picture

A structural view on gold does not require the price to move in a straight line. Gold mining equities in particular have experienced significant volatility in recent months, partly because of the broader uncertainty created by the Middle East conflict and its spillover effects into energy markets, equity markets, and investor positioning.

"The market's positioning is fair given gold stocks have been in flux given the Middle East energy crisis. We anticipate that there will be continuing volatility in the short term." says Emanuel.

Volatility in the near term does not undermine a medium-term structural thesis. It does, however, require discipline in how the position is sized and managed. For investors with a genuine medium-term time horizon and a capital preservation objective, near-term price movement is a consideration for entry, not a reason to abandon a well-founded view. The energy shock and its impact on ASX earnings is relevant context for understanding why gold equities have been caught in broader market volatility beyond the gold price itself.

The distinction between near-term volatility and medium-term structural direction is one of the more important analytical judgements in portfolio construction. Conflating the two leads to positions being abandoned at precisely the point where the underlying thesis is most intact.

The Investment Case for Capital Preservation Portfolios

For investors focused on capital preservation, including SMSF trustees and retirees managing accumulated wealth through retirement, gold warrants consideration on several grounds.

First, it provides an asset that is not correlated to domestic equity or fixed income markets in the way that most portfolio holdings are. When both equities and bonds are under pressure simultaneously, which is a feature of stagflationary environments, an allocation to gold can reduce overall portfolio drawdown.

Second, gold's performance in negative real rate environments is structurally aligned with the problem that capital preservation investors are trying to solve. The objective is not to generate the highest nominal return. It is to preserve purchasing power over time. When cash and fixed income are delivering negative real returns before tax, gold addresses that objective more directly than the alternatives.

Third, the risk-adjusted return profile of gold over multi-year periods in environments similar to the current one has been favourable relative to the downside it introduces into a diversified portfolio. This is not a claim about future performance. It is an observation about the mechanism, which remains intact.

What This Means for Portfolio Construction

An allocation to gold or gold-related assets in the current environment is not a speculative call. It is a considered response to a specific set of conditions: negative real rates, sustained monetary stimulus, and an inflation trajectory that gives the RBA limited room to ease.

The absolute return mandate of the Datt Absolute Return Fund provides the flexibility to hold positions across asset classes and sectors based on where the risk-adjusted opportunity is strongest at each point in the cycle. A structural view on gold is consistent with that mandate and with the capital preservation objective that underpins the fund's investment approach.

The Datt Small Companies Fund applies the same research discipline to the Australian small cap universe, which includes a number of gold producers and explorers that are under-researched relative to their large cap peers. Pricing inefficiencies in that segment of the market can create entry points that are not available in more heavily covered gold equities.

Learn More About Our Funds

The Datt Absolute Return Fund and the Datt Small Companies Fund are available to wholesale and sophisticated investors. To understand how the funds approach positioning in the current environment, contact our Head of Distribution, Daniel Liptak, at daniel@datt.com.au.

Frequently Asked Questions

Why does gold perform well when real interest rates are negative?

Gold pays no income. When real interest rates are positive, holding gold has a meaningful opportunity cost relative to bonds or cash. When real rates turn negative, that opportunity cost disappears. Gold retains purchasing power while cash and fixed income erode in real terms, which makes it relatively more attractive as a store of value.

Is gold a short-term trade or a longer-term position in the current environment?

Datt Capital holds a structural view on gold, not a tactical one. The conditions supporting gold, including negative real rates and sustained monetary stimulus, are not short-term phenomena. Near-term price volatility is expected and does not alter the medium-term thesis.

How does gold fit into a capital preservation strategy for SMSF investors?

Gold provides a source of return that is not correlated to domestic equities or fixed income in the same way as most portfolio holdings. In a stagflationary environment where both asset classes are under pressure, an allocation to gold can reduce overall portfolio drawdown and preserve purchasing power over the medium term.

What is the difference between gold bullion and gold equities?

Gold bullion tracks the spot price of gold directly. Gold equities, including ASX-listed gold producers and explorers, provide leveraged exposure to the gold price because fixed production costs mean that revenue rises faster than costs when the gold price increases. Gold equities also carry company-specific risk related to reserves, production costs, and management quality, which is why stock selection in this segment requires primary research rather than sector-level analysis.

How does the absolute return mandate approach gold exposure?

The Datt Absolute Return Fund holds positions across asset classes and sectors based on where the risk-adjusted opportunity is strongest at each point in the cycle. A structural view on gold is consistent with the fund's capital preservation objective and its mandate to target positive returns across market conditions.