Asset Managers Rebuild Gold Positions Amid Rising Demand

Despite recent price volatility, some of the world's largest asset managers are rebuilding their gold positions. According to Bhanu Baweja, chief strategist at UBS Investment Bank, the current gold rally began in 2018 and was initially driven by falling real interest rates and accommodative monetary policy. However, after Western countries froze Russia's foreign-exchange reserves, reserve and asset managers around the world began questioning which reserves would remain truly safe during a crisis.

The answer, for many, was gold. Central banks and sovereign wealth funds in emerging economies have increased their gold allocations from 5 to 11 percent of their reserves since 2022. Gold has also become less sensitive to interest-rate increases while benefiting strongly from rate cuts. Baweja expects deteriorating public finances, declining confidence in government bonds, and the search for greater diversification to provide further support for the gold price.

Some asset managers warn that any further rise will be accompanied by considerable price volatility. Higher bond yields and the increasing likelihood of an interest-rate hike by the Federal Reserve could put pressure on the gold price in the short term. Nevertheless, they still regard gold as an attractive hedge within a broader investment portfolio.