Gold's status from ‘theoretical' to ‘tactical' hedge

Business Times

4 days ago

IN TODAY'S fragile political and financial environment, gold is regaining prominence in the strategies of warily observant reserve managers.
'Gold is good when other assets are not safe,' said a participant at the Official Monetary and Financial Institutions Forum's (OMFIF) annual seminar in London, in partnership with State Street Global Advisors (SSGA) in May.
The event brought together senior representatives from central banks, public pension funds and sovereign funds to discuss how geopolitical risks and shifting market dynamics are shaping reserve strategies.
The remark, however, encapsulates a growing shift in how central banks perceive gold's role in an increasingly complex global environment. This change has brought gold back to the centre of reserve management strategy.
A structural repositioning
Central banks have now recorded three consecutive years of elevated demand for the metal, resulting in net purchases of 365 tonnes in the final quarter of 2024 – the highest quarterly figure on record, according to the World Gold Council.
This follows annual purchases of more than 1,000 tonnes in both 2022 and 2023. Major buyers have included China, Turkey and India, while countries such as Poland, Hungary and the Czech Republic have also made notable additions relative to the size of their reserve portfolios.
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The rationale behind this shift is not purely tactical. As explored in OMFIF's 2024 report Gold and the new world disorder, gold is once again being treated as a strategic asset, not because it offers yield or efficiency, but because of what it represents.
It serves as a symbol of political neutrality and security in times of fragmentation and independence from the liabilities of any one issuer. That argument – once seen as a theoretical hedge – is increasingly propelling real changes in allocation.
Political developments have added urgency to these shifts. With the return of US President Donald Trump to the White House this year, concerns over trade tensions, fiscal profligacy and the reliability of global partnerships have resurfaced. The US dollar's politicisation is also a growing concern even among traditional allies of the US.
As one roundtable participant noted, the issue is not just what Trump might do, but how quickly markets react to tariff decisions and how long that uncertainty might linger. As a result, central banks are preparing for a more fractured global financial order.
Gold as a portfolio stabiliser
Across the OMFIF-SSGA discussion, there was broad consensus that structural volatility – driven by sanctions, shifting trade dynamics and rising geopolitical risk – has made diversification more urgent and gold more relevant. One panellist noted that the role of gold is evolving from a legacy asset into a core pillar of portfolio stability.
Another panellist pointed out that gold has become what central banks turn to when other assets no longer feel safe, with record prices now seen as a reflection of trust rather than speculative excess. Another observed that reserve management is increasingly influenced by broader themes of strategic autonomy and long-term resilience. Gold, unlike other assets, is seen as consistent with both objectives.
Meanwhile, other viable diversifiers to the US dollar remain limited. The euro faces structural challenges and remains institutionally incomplete. The renminbi, despite greater use in bilateral trade, lacks the convertibility, transparency and liquidity required of a global reserve anchor.
Other currencies such as the yen, pound and Canadian or Australian dollars lack the scale and liquidity needed to absorb major reallocations. As one panellist remarked: 'This isn't mass de-dollarisation. It's a gradual repositioning driven by a structural loss of trust.'
Absence of alternatives
In this environment, gold has emerged as the only strategic fallback. It is not a currency, yet it functions as one in times of strain. The forthcoming Global Public Investor 2025 report, launching on Jun 24, examines whether this shift is now translating into a structural increase in gold's share of global reserves.
For the past four years, our annual survey of central banks has consistently shown that reserve managers plan to increase their gold allocations. This has now materialised.
For many central banks, there seems to be growing signs that this trend will continue as gold evolves from a tactical hedge into a long-term strategic asset. OMFIF
The writer is an economist at the Economic and Monetary Policy Institute, OMFIF