Up 48% in 2025, Can Gold Continue to Crush the S&P 500 in 2026?

Gold has done the unthinkable -- passing $4,000 per ounce on Oct. 6. For context, gold was below $2,000 an ounce two years ago. The move may come as a surprise, since gold tends to underperform the S&P 500 during bull markets, when investors look to take on more risk with growth stocks.

Here's why gold is doing better than the stock market, and whether it can crush the S&P 500 again next year.

Image source: Getty Images.

Why gold is outperforming the stock market

Historically, gold has been viewed as a safe asset during times of economic uncertainty. But gold has crushed the S&P 500 year to date, and over the last three years.

However, the S&P 500 has produced monster returns over the last 15 years. In fact, one dollar invested in the S&P 500 15 years ago would have grown into $7.67 with dividends included. The same dollar invested in gold would have grown into $2.90, mainly because gold prices declined in the first half of the 2010s.

Data source: YCharts.

Arguably, the most important factor driving gold higher is currency risk. Central banks of countries like China and India are looking to increase gold's share in their total reserves. So there's consistent demand, independent of what is happening in global stock markets.

Countries want to hedge against economic instability and geopolitical tensions by diversifying their reserve portfolios and reducing reliance on the U.S. dollar. Even within the U.S., disagreements between President Donald Trump and Federal Reserve Chair Jerome Powell are cause for uncertainty. Interest rate policy affects the economy and the strength of the U.S. dollar on the global stage.

According to data by Morgan Stanley, the value of the U.S. dollar relative to a basket of other currencies fell by 11% in the first half of 2025, which was the biggest decline in more than 50 years. So it's no surprise that some of the U.S.'s closest allies, like Japan, have been increasing their gold reserves, presumably to be less tied to the dollar.

Central banks are loading up on gold

The U.S. still holds the largest number of gold reserves in tonnes, but these reserves have remained essentially unchanged for years. The same goes for many Western European countries. However, China, India, Japan, Turkey, and Poland have all significantly increased their gold reserves over the last five years.

Data source: Bullion Vault.

China's and India's gold buying is particularly noteworthy because these countries have the most reserves when factoring in foreign exchange. Their decisions to reduce reliance on the dollar by buying gold and diversifying their foreign exchange reserves have a big effect on the price of gold.

Data source: World Gold Council.

Reports indicate that the Reserve Bank of India decreased its U.S. Treasury bill holdings by around 6% between June 2024 and June 2025 while increasing its gold reserves by around 5%. Meanwhile, China has been the largest global buyer of gold for several years now.

Buying gold and stocks at all-time highs

Gold is outperforming the S&P 500 largely due to monetary policy adjustments by some of the world's largest economies. Despite economic uncertainty, the S&P 500 has done incredibly well in recent years, largely because of big run-ups in growth-focused sectors like technology and communications. But valuations are extended, meaning it's more important than ever for folks to build their portfolios around high-quality companies that have what it takes to grow into their valuations.

Investors looking to buy gold could consider gold exchange-traded funds (ETFs) as an alternative to the security, storage, and liquidity risks inherent with holding physical gold. The iShares Gold Trust (NYSEMKT: IAU) and SPDR Gold Shares (NYSEMKT: GLD) stand out as top ETFs for investors looking for simple and straightforward ways to hold gold in their brokerage accounts.

However, it's worth understanding that gold has risen significantly in a short period. That could leave it vulnerable to a sell-off, even if the long-term investment thesis remains strong.

Daniel Foelber has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.