Context: The geopolitics premium meets the risk budget

Gold’s resurgence is not a single-issue story. A multi‑polar world, sanctions risk in cross‑border payments, and a softer US dollar have converged with persistent geopolitical crises. The global gold market was valued at roughly US$276 billion in 2023 and is forecast to reach about US$458 billion by 2032, a 5.8% CAGR, with Asia–Pacific representing an estimated 66% share in 2023. At the same time, the official sector has been a structural buyer: according to industry data, central banks purchased a combined c.2,100 tonnes in 2022–23, the strongest two‑year run on record, with demand led by emerging markets.

As Andrew McAuley, Chief of Investments, UBS Global Wealth Management Australia, notes, “gold is functioning as a geopolitical hedge,” with central banks diversifying away from US Treasuries into bullion. World Gold Council research echoes the rationale: reserve managers cite long‑term store of value, performance in crisis, and lack of default risk as primary motivations. Despite rising real yields since 2022, bullion has printed successive highs through 2024–25—an anomaly explained by official‑sector accumulation and the search for sanctions‑resistant reserves.

Decision: China’s reserve pivot and an Australian asset owner’s allocation upgrade

China (sovereign case): Against the backdrop of potential financial sanctions, settlement fragmentation, and a desire to reduce reliance on US assets, Beijing incrementally raised the share of gold in its reserves through steady monthly purchases reported over 2023–24. The strategic intent: lower exposure to US duration risk, improve crisis‑liquidity optionality, and anchor confidence in the renminbi’s long‑term credibility as China advances alternative rails (e.g., CIPS) and local‑currency trade.

Australian asset owner (portfolio case): An anonymised A$50 billion industry super fund (“the Fund”) reviewed strategic asset allocation in mid‑2024 after stress‑testing equity, credit, and currency shocks. Baseline allocations had limited explicit tail hedges. The investment committee elected to lift gold from 0.5% to 2.0% of total assets, targeting: negative‑to‑low correlation in acute drawdowns, protection against AUD weakness in risk‑off periods, and a partial hedge to inflation and geopolitical shock.

Implementation: Turning policy into position

Sovereign toolkit: China’s execution relied on a blend of domestic supply capture (state guidance to miners), discreet OTC purchases through state banks, and accumulation via the Shanghai Gold Exchange. The operational preference was for physically held, unencumbered reserves under domestic custody to minimise seizure risk and reduce dependency on Western clearing systems. The decision complemented broader reserve diversification—moderating US Treasury holdings and increasing non‑USD assets—while retaining sufficient liquidity to manage balance‑of‑payments needs.

Portfolio toolkit (the Fund): The Fund opted for a primarily physical approach to minimise basis risk:

• 50 bps in a locally listed, physically backed ETF with transparent bar lists and Australian custodial storage (Good Delivery bars).
• 100 bps via an institutional segregated account with an LBMA member, on an allocated basis with no rehypothecation rights.
• 50 bps via exchange‑traded futures for tactical rebalancing and to manage inflows/outflows without incurring full logistics costs.

Key design choices included keeping the exposure unhedged to USD to benefit from the historical tendency of the AUD to weaken during global stress, establishing a 1.5–2.5% rebalancing band, and deploying a light options overlay (covered calls over a portion of the position) to monetise volatility spikes without diluting the core hedge. Governance enhancements covered daily look‑through reporting, NSFR/Basel III counterparty assessments for bullion banks, and alignment with internal liquidity buckets (gold classified as a Tier‑2 liquidity sleeve).

Technical deep dive: Why gold behaves differently now

Three structural shifts underpin today’s gold dynamics:

• Sanctions‑resilience premium: Physical gold held domestically is difficult to freeze, unlike reserve deposits at foreign central banks. This feature has explicit value in central bank utility functions.
• Balance‑sheet diversification: Official‑sector buying is relatively price‑insensitive and long‑horizon, dampening the usual negative relationship with real yields.
• Currency convexity for AUD investors: Gold is priced in USD; in risk‑off episodes, AUD depreciation amplifies local returns, improving hedge efficiency for Australian portfolios.

Second‑order effects are visible across metals: elevated gold demand has tightened the gold/silver ratio range and supported silver and platinum intermittently, influencing refinery runs and industrial users’ procurement strategies.

Results: Market outcomes and measurable portfolio impact

Market level: Since 2022, near‑record official purchases coincided with bullion printing all‑time highs through 2024–25. Price leadership has been official‑sector and Asia‑led: Asia–Pacific commanded about two‑thirds of global demand in 2023, with China and India pivotal on the retail side, and China, Singapore, Turkey and Poland prominent on the official side. The broader market value trajectory—US$276 billion in 2023 to a projected ~US$458 billion by 2032—signals durable institutionalisation of gold’s role.

Portfolio level (the Fund): Back‑tested across 2005–2024 and live‑observed during 2024–25 volatility windows, the 2% gold sleeve delivered:

• Return contribution: +35–60 bps to total fund returns in a 12‑month period marked by elevated geopolitical tension and growth scares, largely via USD/AUD translation and spot appreciation.
• Drawdown relief: Peak‑to‑trough drawdown reduced by ~60–120 bps versus the pre‑change policy portfolio during equity sell‑offs.
• Risk‑adjusted uplift: Portfolio Sharpe ratio improved by 5–10% relative, consistent with industry research showing 2–5% gold allocations enhance risk‑adjusted outcomes.
• Liquidity integrity: 95% of the sleeve could be liquidated same‑day without material price impact, preserving rebalancing agility.

Sovereign level (China): While reserve performance is not marked‑to‑market publicly, the accumulation strategy achieved three objectives: lower exposure to US duration and policy risk, improved crisis optionality through domestically held bars, and credibility signalling for alternative settlement ambitions. The cost was acceptance of bullion’s carry and storage expense, offset by reduced vulnerability to asset freezes.

Lessons: What decision‑makers should do now

1) Treat gold as infrastructure, not just an asset. For central banks and treasurers, custody, bar lists, and legal jurisdiction are strategic decisions. Explicitly price the sanctions‑resilience premium in reserve optimisation.

2) Size the allocation to the risk, not the headline. For diversified portfolios, 1–3% can deliver material drawdown benefits without crowding out growth assets; above 5% requires clear conviction about regime change.

3) Choose physical first; use derivatives as a bridge. Physical (allocated) minimises counterparty and basis risks; futures and options are best for tactical adjustments and volatility harvesting.

4) Leverage currency dynamics. For Australian investors, leaving gold unhedged to USD typically enhances crisis protection due to AUD’s beta to global risk.

5) Build governance for the new regime. Set rebalancing bands, define liquidity tiers, and update risk models to recognise that central‑bank‑driven demand can keep gold buoyant even with positive real rates.

6) Watch the spillovers. Rising gold allocations can compress returns in other safe assets and lift related metals. Procurement, treasury, and treasury‑adjacent functions (insurance, working capital) should stress‑test for tighter collateral haircuts and shifting correlations.

Gold’s role is evolving from passive diversifier to active geopolitical hedge. Early movers—whether sovereigns engineering de‑risked reserve stacks or funds installing small, disciplined sleeves—are securing resilience at a reasonable cost. In an era where payment rails, trade blocs and policy rates are all in flux, that optionality is fast becoming a competitive advantage.