Gold’s strategic revival in a fragmented world:                        A modern portfolio component

As the global economy faces higher inflation and policy uncertainty, geopolitical instability, rising tariffs and shifting reserve strategies, the need for resilient portfolio construction becomes paramount. 

Consider the following dynamics:

• Globalisation is retreating: The,rules-based order of the 90s and early 2000s is being increasingly characterised by disruptive trade policies and clashes between geopolitical and economic objectives – resulting in a race to protect industries and ensure production domestically —from semiconductors to green energy.
• US-led tariffs signal economic decoupling: The fusion of national security with economic policy is accelerating a shift toward regional blocs and strategic autonomy.
• Monetary reserves are diversifying: Central banks are taking a dynamic approach to asset allocation by boosting gold reserves to hedge fiat and geopolitical risk.
• Inflation remains sticky: Services, housing, and reshoring costs are anchoring inflation expectations, weakening the safe-haven role of nominal bonds and resulting in higher bond-to-equity correlations. 
• Gold is reasserting its role: In this environment, gold is not only a store of value—it’s a strategic asset with unique cross-cycle properties.

These factors coincide with a sharp rise in Economic Policy Uncertainty (EPU), an indicator developed by Baker, Bloom, & Davis, 2016. Since the late 1990s, data shows that as EPU increases, gold prices tend to rise, reflecting gold’s key role as a potential safe haven when policy uncertainty increases.

From the late 1960s to the early 1990s, investors relied on gold as a dependable hedge against inflation. But as inflation stabilised around the 2% target of central banks, global supply chains in tradeable goods expanded and China’s manufacturing deflation filtered through global prices, gold fell out of favour.

In this environment, equity and government bond returns showed very low or negative correlation, giving rise to the so-called 60/40 portfolio mix of equities and bonds, which delivered strong performance. But rising equity–bond correlations—especially post-2022—have eroded this portfolio strategy’s effectiveness for hedging macro shocks. We’ve returned to a world where macro shocks can hit both equities and government bonds simultaneously.

Gold offers distinct advantages in this regime, since it has: 

• No counterparty risk
• Global liquidity and physical backing
• Low supply elasticity due to high production costs and long development cycles
• Consistently low correlation to both equities and bonds
• A proven track record as a store of value

In Table 1, we show gold’s low correlation to other asset class returns since the Covid onset in Q1, 2020.

There’s also been an observable shift in the way central banks approach reserve strategies, led by emerging market central banks. Since 2020, net gold purchases have surged, with China (+17%) and India (+38%) leading a broader realignment, as Table 2 shows. 

Source: FTSE Russell and World Gold Council, as of March 31, 2025. Past performance is no guarantee of future results.

Table 2 shows that the growth in central bank gold reserve holdings across Asia, Africa, and South America between 2020 and 2024 has been around 18.5%. 

A few Eastern European countries, such as Poland, Serbia, and Hungary, have also significantly increased their gold reserves over the past five years, although this trend has not been reflected Europe-wide, where reserves have grown by only 3%.

Central bank reserves for North America and Oceania remained flat during the period. However, there is a recent indication that the US may be reviewing its gold reserve strategy, with suggestions by the Trump administration that a review of the reserves in Fort Knox is under consideration. 

There were three main reasons for the recent surge in Asian, African and South American holdings: 

• Shifting trade patterns & conflict risk: A more fractious geopolitical landscape may have caused some central banks—especially in the Global South—to diversify away from dollar-based reserves.
• Hedging against fiat currency instability: Post-COVID fiscal expansion has left many sovereigns with rising debt and inflation risks, reinforcing gold’s appeal as a non-sovereign asset.
• Liquidity in crisis: Gold can be quickly monetised without reliance on foreign clearing systems—something that could be critical in an era of high policy and financial uncertainty.

Therefore, gold may be becoming a neutral, tariff-proof reserve asset—and a global haven.

However, gold’s performance hinges not just on inflation itself, but on how central banks respond:

• If inflation rises above certain key threshold levels, aggressive rate hikes and dollar strength can reduce gold returns
• But during persistent or “sticky” inflation, gold benefits from declining real yields and policy uncertainty.

This suggests gold can be a tactical hedge—responsive to economic policy dynamics, as well as headline CPI.

We also note that adding gold to a portfolio may improve resilience. Comparing a 60/20/20 equity–bond–gold portfolio to the traditional 60/40, the gold-inclusive mix began to outperform during the COVID-19 pandemic and more visibly after 2022, when rising equity–bond correlations reduced the diversification benefits of the 60/40 portfolio.

During downturns, gold’s distinct behaviour and low correlation with other asset classes helped cushion losses, highlighting its value as not only a passive hedge—but also a tactical shock absorber in multi-asset portfolios.

Recent performance suggests gold has acquired a broader investment role than its traditional inflation hedging characteristic, based on its low correlation with other asset class returns. It offers liquidity, neutrality, and strategic options in an era marked by de-globalisation, inflation persistence, and increased policy uncertainty.

Whether held by central banks or institutional allocators, gold has delivered strong returns since Covid. For asset managers facing the breakdown of traditional diversification, gold deserves renewed attention—not as an afterthought, but as a core risk-management tool.