Gold: Real Yields, Inflation, and the Case for a 5-10% Portfolio Allocation at $5,000

Gold pays no interest, no dividends, and generates no cash flow. Its primary competition for capital is the risk-free real return available from US Treasury bonds. When real yields — the nominal 10-year Treasury yield minus expected inflation — are high, gold's opportunity cost is steep. When real yields fall, gold becomes relatively more attractive.

As of February 20, 2026, the 10-year Treasury yield stands at 4.08% and the 10-year breakeven inflation rate is 2.28%, producing a real yield of approximately 1.80%. While that is positive, it has been falling: the 10-year nominal yield was 4.29% as recently as February 4, reflecting the market's expectation that the Federal Reserve will continue cutting rates.

The Fed funds rate has already dropped from 4.33% in early 2025 to 3.64% in January 2026 — a cumulative 69 basis points of easing over approximately nine months. With inflation running at 2.16% year-over-year based on the latest CPI reading of 326.588 (January 2026), the Fed still has room to cut further without reigniting price pressures.

Historically, gold has rallied most aggressively during periods when real yields are falling or negative. Between 2019 and 2020, as the Fed cut rates to zero and real yields turned deeply negative, gold surged from $1,300 to $2,075. The current trajectory — declining nominal yields with relatively stable inflation expectations — is creating a similar tailwind, albeit from a higher base.

The Consumer Price Index has risen from 319.679 in February 2025 to 326.588 in January 2026, a year-over-year increase of approximately 2.16%. While this is close to the Fed's 2% target, it has remained stubbornly above it for four years running — and the latest readings suggest the final stretch of disinflation is proving sticky.

For gold investors, the relevant question is not whether inflation is 2.1% or 2.3%, but whether the purchasing power of the dollar is eroding faster than the yield on safe assets. With the Fed funds rate at 3.64% and CPI at 2.16%, the real short-term rate is approximately 1.48% — positive, but narrowing as the Fed continues to ease.

Gold has historically outperformed during inflationary regimes not because it tracks CPI perfectly, but because it serves as a store of value when confidence in fiat currencies weakens. The metal's 79% gain over the past 52 weeks — from $2,844 to $5,081 — dramatically outpaces the 2.16% erosion in the dollar's purchasing power, suggesting that gold is pricing in more than just current inflation. It is pricing in the risk that inflation reaccelerates, that fiscal deficits remain unchecked, and that the Fed's credibility continues to be tested by political pressure.

The Trade Weighted US Dollar Index (DTWEXBGS) has declined from 118.50 in early February to 117.53 as of February 13, a move of approximately 0.8% in less than two weeks. While not dramatic in isolation, the direction matters: gold is priced in dollars, and a weaker dollar makes the metal cheaper for foreign buyers, boosting demand.

The dollar's decline coincides with the Supreme Court's landmark ruling striking down the reciprocal tariff framework, which has injected significant uncertainty into US trade policy. President Trump has since announced new 15% global tariffs, but the legal landscape has shifted fundamentally. Trade policy uncertainty historically weakens the dollar as investors question the stability of the US economic framework.

For gold, the weakening dollar is a secondary but persistent tailwind. The metal's 50-day moving average of $4,772.63 and 200-day moving average of $4,029.73 both sit well below the current price, confirming the strength of the uptrend. The gap between the current price and the 200-day average — approximately 26% — is wide by historical standards, suggesting the rally has been exceptionally strong but also that any correction could find support well above the $4,000 level.

Beyond the macro framework of real yields, inflation, and the dollar, gold benefits from structural demand that has accelerated since 2022. Central banks — particularly in China, India, Poland, Turkey, and Singapore — have been net buyers of gold for 15 consecutive quarters, driven by a strategic desire to diversify reserves away from US dollar assets.

The World Gold Council reported that central banks purchased over 1,000 tonnes of gold in both 2023 and 2024, roughly double the pace of the prior decade. This buying has continued into 2025 and 2026, with the People's Bank of China alone adding an estimated 200 tonnes over the past 18 months. This institutional demand creates a floor under prices that did not exist in previous cycles.

ETF flows have also turned positive in recent months after two years of outflows. As gold crossed $4,000 and then $5,000, retail and institutional investors have increased allocations — a momentum effect that tends to be self-reinforcing in the gold market.

The combination of central bank accumulation, ETF inflows, and limited new mine supply — global gold production has been essentially flat at approximately 3,600 tonnes per year for the past five years — creates a supply-demand imbalance that supports higher prices even if the macro tailwinds moderate.

For investors considering a gold allocation in 2026, the key question is not whether gold will hit $6,000 — that depends on factors no one can predict — but whether it deserves a structural place in a diversified portfolio.

The academic case for gold allocation rests on three pillars: low correlation with equities, positive real returns during inflationary periods, and crisis-period outperformance. Gold's correlation with the S&P 500 has historically been close to zero over long periods and turns negative during equity bear markets — precisely when portfolio protection is most valuable.

A standard 60/40 stock-bond portfolio with a 5-10% gold allocation funded from bonds has historically improved risk-adjusted returns by reducing drawdowns without meaningfully sacrificing long-term performance. With bond yields still above 4%, some investors may hesitate to swap fixed income for a non-yielding asset. But gold has returned approximately 79% over the past year while 10-year Treasuries have returned roughly 4% — a striking difference that underscores gold's role as a complement to, not a replacement for, bonds.

Practical options for gaining gold exposure include physical bullion, gold ETFs (such as GLD or IAU), gold mining equities, and gold futures. For most individual investors, low-cost ETFs offer the simplest access with minimal tracking error. The expense ratios on major gold ETFs run 0.25-0.40% annually — a small price for portfolio insurance that has delivered outsized returns in the current environment.

At $5,081, gold is expensive relative to its own history — it traded below $2,000 as recently as early 2024. But expensive is not the same as overvalued. If the Fed continues cutting rates, the dollar continues weakening, and inflation remains above target, the macro framework that drove gold from $2,844 to $5,081 remains intact.