Gold is back in focus, and with good reason. After a series of record-breaking performances, it is now in vogue for investors looking for a hedge against inflation, geopolitical risks, and market volatility.

For those eyeing physical gold bullion or ownership of the yellow metal through products such as the Global X Physical Gold Structured (ASX: GOLD) ETF, it's crucial to understand how to incorporate gold into your portfolio.

So, let's examine the do's and don'ts of holding gold and how much to allocate in your portfolio.

Why allocate to gold in the first place?

First, let's unpack what's behind this latest gold rally, that's seen the precious metal rise to A$5,034 per ounce, equal to US$3,228 an ounce – some of the highest prices on record.

Gold holds a "save haven" status amongst other asset classes, and investors have traditionally turned to the yellow metal in times of uncertainty.

This time is no different.

According to Goldman Sachs, investors have bid up the price this year as global markets undergo a bout of volatility.

Since March, investors have been increasing their holdings of gold, driven by concerns about the health of the economy and market volatility.

Longer term, Goldman Sachs Research expects prices to be propelled by multi-year demand from central banks. Our analysts' gold price prediction is for these two factors to push the metal to new record highs.

As seen, buying from global central banks, looking to diversify their holdings from US Treasury Securities, has also spurred the rally.

Goldman forecasts that it could reach US$3,700 per ounce (A$5,767) by 2025, potentially rising further as investors pile into exchange-traded funds (ETFs) tracking the gold price.

But buyer beware: In its latest Fund Manager Survey, Goldman rival, Bank of America, noted nearly half of fundies surveyed reckon the yellow metal is overvalued.

Speaking to Bloomberg Television, the firm's Francisco Blanch said "everyone's long gold", which could present a risk if all decide to sell at once.

Further, here's some food for thought before reading on: The metal pays no interest and doesn't represent a share in a business, which produces things like products and services and pays dividends.

How much gold should you hold?

Ultimately, the key question for investors is: How much gold should you include in your portfolio? I'll start this off with the standard finance and investment response: It depends. I know. Forgive me.

It depends on your own financial circumstances, portfolio positioning, and long-term investment goals, notwithstanding your own views on the precious metal.

That said, there are some fairly rigid recommendations from the team at VanEck.

The investment firm notes that a "well-diversified portfolio" typically includes a mix of stocks, bonds, and alternative assets like the yellow metal in question. It ran a study, looking at returns going back to the 1970s, comparing these three major asset classes.

Findings were notable.

The answer: investors should have allocated 18% to gold and 82% to the portfolio of stocks and bonds.

While there's no one-size-fits-all answer, a 5% to 20% allocation to gold is well supported with a time-tested approach to asset allocation.

This should be enough to provide significant diversification benefits and protection against inflation, market volatility and geopolitical risks.

So, 5-20% of your investment portfolio weighted in gold, either as physical bullion or ETFs, equal to 5 to 20 cents for every dollar invested.

This aligns with hedge fund titan Ray Dalio's "All Weather" strategy, which currently allocates 7.5% to the metal.

Foolish Takeaway

Many experts agree that a small allocation to gold in an investment portfolio has its benefits. These positives tend to expand in times of uncertainty, where the metal really shines (pardon the pun).

In today's world dominated by economic uncertainties, many believe its role in a diversified portfolio cannot be overstated. Based on its internal findings, VanEck recommends 5-20%.

But all that glitters isn't gold (again, pardon), so I'll leave investors with Warren Buffett's words of wisdom comparing it to stocks: "The gold itself doesn't produce anything".

In the long run, a diversified portfolio seems to always come out on top.