Renewed macro support for Gold

Financial markets initially responded positively to the outcome of the U.S. election. Government bond yields rose, initially absorbed well by cyclical asset classes like equities, as they reflected higher growth expectations tied to Trump's policy agenda.

However, the mood shifted in December as Donald Trump’s increased public appearances drew attention to potential U.S. trade policy risks. His suggestion that Canada might become the 51st U.S. state with Justin Trudeau as governor—if Canadian authorities believed they could not withstand a proposed 10% tariff on U.S. imports—was likely a joke, but it signaled to markets that trade policy could become an immediate focus following Trump’s inauguration on January 20, 2025.

Trade tariffs often lead to higher inflation and higher rate expectations. This prospect has already cast a shadow over Wall Street. Beyond trade policy, uncertainty surrounding Trump’s foreign policy stance—particularly regarding the war in Ukraine and tensions in the Middle East—adds to the unpredictability of geopolitical risks.

As the inauguration date approaches, preparing for market volatility in 2025 becomes essential¹. Investors should consider strategic hedges to navigate these evolving risks effectively.

We recently reviewed the gold allocation in our multi-asset hybrid mandates and decided to keep a moderate overweight in light of two considerations. First, we would like to keep a hedge against geopolitical risks, which we see rising. Second, we believe gold should benefit from our outlook on real yields. In this piece, we outline our reasoning in detail and the evidence backing this up.

Gold: A Reliable Tool for Portfolio Diversification

Gold’s role as a portfolio diversifier remains compelling, especially in times of heightened geopolitical risk². We conducted an event analysis using the Geopolitical Risk Indicator (GRI) developed by Dario Caldara and Matteo Iacoviello, as shown in Figure³.

Our findings reveal that the GRI closely aligns with major geopolitical events over time, accurately tracking 40 well-documented instances. For deeper insights, we highlighted the highest 18 spikes (events) in the graph and conducted a detailed scenario analysis to assess gold’s performance during such periods.

While the Geopolitical Risk Indicator (GRI) proved less effective as an early warning system—often spiking too shortly before an event—it has been invaluable for analyzing how asset classes behave around these events. Our research reveals that, although geopolitical disruptions can cause short-term market volatility, asset prices generally recover relatively fast after the event. For example, as shown in Figure 2, equities traded higher 12 months after the event in 80% of the cases analyzed. Additionally, in 70% of cases, equities had already rebounded within just three months. These results are robust when we divide the sample into different time periods (1900-1950, 1950-2000, 2000-2024)⁴, as the behavior of equities before and after the geopolitical event is relatively similar across all three sub-samples.

Gold vs. Equities: Resilience in Geopolitical Turmoil

For the analysis illustrated in Figure 3, our sample begins in 1970, when gold became tradable. The graph compares the performance of equities and gold before and after the 18 geopolitical events chosen within the sample period.

The results highlight gold’s appeal as a diversification tool during geopolitical crises. While equities typically weaken after such events—remaining, on average, below pre-event levels for four weeks—gold exhibits remarkable stability. In fact, gold often begins to rally post-event, underscoring its resilience and value as a safe-haven asset.

This behavior reinforces the importance of incorporating gold into investment portfolios, particularly for those seeking to mitigate risks associated with geopolitical uncertainty and market volatility.

Gold’s Potential Shines Bright, Even in the Base Case

Beyond its diversification benefits, gold’s prospects remain promising in light of its behavior relative to yields. Historical data, shown in Figure 4, illustrates gold’s historical negative correlation with U.S. real yields, a relationship that has consistently influenced its performance.

Consider that in conjunction with Figure 5, which shows that real yields have risen significantly in the recent past and currently stand above their historical average (2.3% now vs a historical average of 1.5%). If investors believed that some mean reversion was due, support for gold would ensue, given the inverse relationship with real yields discussed above.

The Federal Reserve’s projections further reinforce gold’s potential. Assuming the Fed’s long-term inflation target of 2% and its natural rate estimate (long-term federal funds projection) of 3%⁵, the implied long-term real yield estimate is 1%. This figure is slightly below the historical U.S. real yield average of 1.5%, making the case as well for falling real yields and gold support. The major risk to our view would be a significant decrease in geopolitical risks or a further rise in yields within an environment of stable inflation⁶.

In conclusion, gold’s unique positioning—both as a hedge and as an asset with room for further upside—makes it a compelling choice for investors, even under conservative base case assumptions.