Gold – hedge, diversifier, or trade of the moment?

A strong year, but a more cautious stance

Gold has been one of the standout performers of the past year. Our view has been constructive, and the rally has been significant. That said, as we look into 2026, we have adopted a slightly more cautious stance – not because the investment case has disappeared, but because the scale and speed of the move already reflect a great deal of bad news.

What has driven the rally?

The recent surge in gold prices has been driven by a familiar but potent mix: heightened geopolitical uncertainty, growing concerns around fiscal sustainability, and a continued shift by central banks away from the US dollar and towards gold. These themes have not faded. If anything, they have been reinforced by renewed tensions around US fiscal and monetary policy, keeping gold firmly in focus as a potential portfolio diversifier.

Key drivers include:

Geopolitical uncertainty – periods of conflict or political instability tend to increase demand for perceived safe-haven assets.

Fiscal sustainability concerns – rising government debt levels raise fears of currency debasement, supporting demand for hard assets.

Central bank reserve diversification – several central banks have increased gold holdings to reduce reliance on the US dollar.

Political risk and diversification benefits

Gold’s strength has accelerated more recently following a fresh bout of political uncertainty under a second Trump presidency. Developments around Venezuela and Greenland have contributed to renewed market unease, with the latter coinciding with a pull-back in equity markets. In that context, gold has once again behaved as investors might hope – providing diversification when traditional risk assets wobble. It can be seen, in part, as a hedge against political chaos.

Volatility remains the price of admission

However, gold is not a low-risk asset. Over the past year, prices have risen by close to 100%, from around $2,700 per ounce to above $4,800. While that has delivered strong returns, the magnitude of those moves is itself a clear reminder of gold’s inherent volatility.

Unlike equities or bonds, gold produces no income – no dividends, no coupons – and therefore has no fundamental valuation anchor. Its price is driven largely by sentiment, real interest-rate expectations, and currency movements. As a result, shifts in policy rhetoric or rate expectations can trigger sharp moves in either direction.

'However, gold is not a low-risk asset.'

—Edward Margot, head of client investment strategy at FE Investments

'Unlike equities or bonds, gold produces no income – no dividends, no coupons – and therefore has no fundamental valuation anchor.'

—Greg Colley, investment strategist at FE fundinfo

Where does gold fit in portfolios?

Looking ahead, gold’s role may ultimately depend on how the current global backdrop evolves. If political tensions persist and policy uncertainty remains elevated, gold’s appeal as a hedge is understandable. If instead we move towards a more stable, predictable global environment – where growth and fundamentals regain prominence – traditional asset classes may once again take the lead.

Gold has featured in some of the portfolios we manage, but typically only where risk budgets are sufficiently high to absorb this level of volatility without crowding out other exposures.

A flexible, co-manufactured approach

Flexibility sits at the heart of our co-manufactured approach. Advisers know their clients and the journey they want portfolios to support; our role is to help translate that philosophy into a robust investment mandate. By combining those perspectives, we aim to ensure portfolios remain aligned with their objectives, while taking risk in a considered and deliberate way.

Important information      

This is not a financial promotion and is not intended as a recommendation to buy or sell any particular asset class, security or strategy.      

All information is correct as at 16/01/2026 unless otherwise stated. Where individuals or FE Investments Ltd have expressed opinions, they are based on current market conditions, they may differ from those of other investment professionals and are subject to change without notice.     

This communication contains information on investments which does not constitute independent research.      

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