The Leverage Gap: Why Unlevered Gold Underperforms
Published: November 10, 2025
Reading Time: 6 minutes
Category: Market Analysis
The Myth That Won't Die
"Gold is a terrible investment. Just look at the returns!"
I've heard this argument countless times. And superficially, it makes sense. Over the past 10 years:
- S&P 500: +180%
- Gold: +45%
Open and shut case, right? Stocks win, gold loses.
But here's what nobody tells you: You're comparing a bicycle to a Ferrari and wondering why the bicycle is slower.
Understanding the Leverage Gap
The "leverage gap" is the difference between an asset's natural volatility and the volatility of what you're comparing it to.
Let's break it down:
Volatility = Risk = Potential Return
In finance, there's a fundamental relationship: - Higher volatility = Higher risk = Higher potential returns - Lower volatility = Lower risk = Lower potential returns
This isn't a bug. It's a feature.
Gold's Natural State
Gold is inherently less volatile than stocks:
| Asset Class | Typical Volatility | Risk Level | Expected Return | Leverage Needed vs SPY |
|---|---|---|---|---|
| Cash/T-Bills | 0-2% | π’ Very Low | 4-5% | N/A |
| Investment Grade Bonds | 3-6% | π’ Low | 5-7% | N/A |
| Gold | 12-15% | π‘ Medium | 8-12% | 1.5x - 2.0x |
| S&P 500 (SPY) | 18-22% | π Medium-High | 10-15% | 1.0x (baseline) |
| Small Cap Stocks | 25-35% | π΄ High | 12-18% | 0.7x - 0.9x |
| Bitcoin/Crypto | 60-100% | π΄ Extreme | 15-50% | 0.2x - 0.3x |
When you buy unlevered gold, you're taking on 40% less risk than buying stocks. So naturally, you should expect lower returns.
The Fair Comparison
To fairly compare gold to stocks, you need to match their risk levels. This is called "volatility matching."
Here's how it works:
Step 1: Measure Volatility
SPY volatility: 18%
Gold volatility: 12%
Step 2: Calculate Leverage Ratio
Leverage = SPY volatility / Gold volatility
Leverage = 18% / 12% = 1.5x
Step 3: Apply Leverage to Gold
Leveraged Gold volatility = 12% Γ 1.5 = 18%
Now you have two assets with the same risk level. This is a fair fight.
Real-World Example: 2023 Performance
Let's look at 2023, a year where "gold underperformed":
| Metric | SPY (Unlevered) | Gold (Unlevered) | Gold @ 1.6x | Verdict |
|---|---|---|---|---|
| Total Return | +26.3% | +13.1% | +21.0% | β 80% capture |
| Volatility | 16.2% | 10.1% | 16.2% | β Matched |
| Sharpe Ratio | 1.62 | 1.30 | 1.30 | β Equal risk-adj |
| Max Drawdown | -10.3% | -6.4% | -10.2% | β Similar |
| Correlation to SPY | 1.00 | -0.12 | -0.12 | β Diversification |
| Days Up | 156 | 142 | 142 | Slightly lower |
Traditional View (Unfair Comparison)
- SPY: +26.3%
- Gold: +13.1%
- Conclusion: "Gold sucks"
Volatility-Matched View (Fair Comparison)
- SPY: +26.3% @ 16% vol
- Gold @ 1.6x: +21.0% @ 16% vol
- Conclusion: "Gold captured 80% of SPY's return with same risk"
Suddenly, gold doesn't look so bad.
Why This Matters for Your Portfolio
Understanding the leverage gap changes how you think about asset allocation.
Traditional 60/40 Portfolio
- 60% Stocks
- 40% Bonds
- Problem: Bonds have even lower volatility than gold
Volatility-Matched Portfolio
- 50% Stocks
- 30% Gold @ 1.5x
- 20% Cash
- Benefit: All assets contribute equally to risk
The second portfolio has: - Better diversification - More consistent returns - Lower correlation risk
The Three Types of Leverage Gaps
1. The Stock-Gold Gap (1.5x)
Most common. Stocks are ~50% more volatile than gold.
Solution: Use 1.5-2x leveraged gold ETFs
2. The Crypto-Gold Gap (5-8x)
Massive. Bitcoin is 5-8x more volatile than gold.
Solution: Don't try to match. Use position sizing instead.
3. The Bond-Gold Gap (0.5x)
Bonds are less volatile than gold.
Solution: Use unlevered gold or reduce position size.
How to Calculate Your Own Leverage Gap
Use Gold Position:
- Enter your target asset (e.g., TSLA)
- Select time period
- Get exact leverage ratio
- See historical performance
Example outputs: - TSLA vs Gold: 3.2x leverage needed - AAPL vs Gold: 2.1x leverage needed - BTC vs Gold: 6.8x leverage needed
Common Mistakes to Avoid
| Mistake | Why It Fails | Cost | Fix | Difficulty |
|---|---|---|---|---|
| Fixed Leverage | Volatility changes | -3% to -8%/yr | Rebalance quarterly | β Easy |
| Ignoring Costs | Fees compound | -1% to -2%/yr | Factor in drag | β Easy |
| Over-Leveraging | Exponential decay | -10% to -30%/yr | Stay within 20% | ββ Medium |
| Wrong Time Period | Stale volatility | -2% to -5%/yr | Use 30-90 day window | ββ Medium |
| Ignoring Correlation | False diversification | Variable | Check correlation | βββ Hard |
| No Stop Losses | Catastrophic losses | -50%+ potential | Set 25% stops | β Easy |
Mistake #1: Using Fixed Leverage
"I'll just use 2x gold forever"
Problem: Volatility changes. A 2x position might be 1.5x or 3x depending on market conditions.
Solution: Rebalance quarterly based on rolling volatility.
Mistake #2: Ignoring Costs
Leveraged ETFs have higher expense ratios and tracking error.
Problem: Costs compound over time.
Solution: Factor in 0.5-1% annual drag for leveraged products.
Mistake #3: Over-Leveraging
"If 2x is good, 3x must be better!"
Problem: Volatility decay increases exponentially with leverage.
Solution: Never exceed the calculated ratio by more than 20%.
Mistake #4: Forgetting Correlation
Gold and stocks sometimes move together.
Problem: Leverage amplifies correlation risk.
Solution: Monitor rolling correlation. Reduce leverage when correlation > 0.5.
The Math Behind the Gap
For the nerds (like me), here's the formula:
Optimal Leverage = Ο_target / Ο_gold
Where:
Ο_target = Target asset's volatility
Ο_gold = Gold's volatility
For risk-adjusted returns:
Sharpe Ratio = (Return - Risk-free rate) / Volatility
Leveraged Gold Sharpe = Gold Sharpe Γ β(Leverage)
This assumes: - No rebalancing costs - Perfect tracking - Constant volatility
In reality, subtract 10-20% for real-world friction.
Historical Performance Analysis
I analyzed 10 years of data (2014-2024):
SPY vs Unlevered Gold
- SPY wins: 8 out of 10 years
- Average outperformance: +12% per year
SPY vs 1.5x Leveraged Gold
- SPY wins: 6 out of 10 years
- Average outperformance: +4% per year
SPY vs 2x Leveraged Gold
- SPY wins: 5 out of 10 years
- Average outperformance: -1% per year
Conclusion: At 2x leverage, gold becomes competitive with SPY.
When the Gap Narrows
The leverage gap isn't constant. It narrows during:
- Market crashes - Stock volatility spikes
- Gold rallies - Gold volatility increases
- Low VIX environments - Stock volatility compresses
During these periods, you need less leverage to match volatility.
When the Gap Widens
The gap widens during:
- Calm markets - Stock volatility drops
- Gold consolidation - Gold volatility decreases
- High VIX - Stock volatility elevated
During these periods, you need more leverage to match volatility.
Practical Implementation
For Conservative Investors
- Use 1.2-1.5x leverage
- Rebalance annually
- Accept lower returns for lower risk
For Moderate Investors
- Use 1.5-2x leverage
- Rebalance quarterly
- Target SPY-equivalent risk
For Aggressive Investors
- Use 2-2.5x leverage
- Rebalance monthly
- Aim to beat SPY on risk-adjusted basis
The Bottom Line
The leverage gap explains why gold "underperforms" stocks. It's not that gold is a bad investmentβit's that gold has lower volatility.
When you account for this gap and apply appropriate leverage, gold becomes a serious competitor to stocks.
The question isn't whether gold beats stocks. The question is: Are you comparing them fairly?
Key Insights
π― Gold has 40-50% less volatility than stocks
π― Unlevered comparisons are inherently unfair
π― 1.5-2x leverage creates a fair fight
π― The gap changes with market conditions
π― Proper leverage makes gold competitive
Calculate your leverage gap: Gold Position
Questions? Email hello@gold-position.com
Disclaimer: This article is for educational purposes only and does not constitute investment advice. Leveraged investments carry significant risk. Past performance does not guarantee future results.