Actively Managed, Gold Makes a Portfolio Shine

Gold as a hedge against a U.S. default

The Trump Administration Ushers in a New Monetary Era

Believing that the new president’s actions will be limited to trade and will not affect global finance, particularly the monetary system, would be naïve. Many see Trump as a fusion of Nixon and Reagan, the two major Republican figures of the past fifty years: Nixon, the anti-elitist, and Reagan, the pro-business leader. Both presidents profoundly transformed the monetary system.

In 1971, Nixon suspended the dollar’s convertibility into gold. In 1985, Reagan convened the G7 at the Plaza Hotel in New York to organize its depreciation. Both faced capital flight and applied radical remedies, much to the dismay of foreign investors.

Trump faces the same problem, as the Fed has raised interest rates to curb inflation and the cost of servicing the debt is increasing by $300 billion per year. However, fighting inflation is an electoral imperative, meaning that rates will remain high. The solution will come from the currency, and Trump has already expressed his desire to weaken the dollar, which would also improve foreign trade.

His team is working on the issue. Stephen Miran, his new economic advisor, published “A User’s Guide to Restructuring the Global Trading System” in November 2024, which explores several options to weaken the greenback. One of these options strongly resembles a selective default on public debt held by non-residents.

Bonds Have Lost Their Protective Role

Once considered a diversifying and protective asset, U.S. government bonds have lost their safe-haven status. Since 2021, the stock-bond correlation has turned positive (+0.64 over three years), amplifying the volatility of a diversified portfolio instead of mitigating it. In 2022, this dynamic led to a simultaneous decline in the S&P 500 (-19%) and 10-year U.S. bonds (-14%), undermining the reliability of the traditional 60/40 allocation model.

Inflation: A Game Changer

A nearly forgotten factor has disrupted the paradigm of globalization and price stability: inflation. This new inflationary regime has worsened an already fragile equilibrium due to the loss of monetary benchmarks. Central banks’ interest rate manipulations, lax monetary and fiscal policies during the COVID era, and, more recently, the use of monetary reserve confiscation as an economic pressure tool have all been events correctly anticipated by a premonitory rise in gold prices, but not by the bond market.

The Return of Gold

What substitute for bonds should be chosen to play this protective role? Historically, during inflationary periods, investors seek refuge in assets that best embody stores of value. If high liquidity is also required, gold emerges as the preferred asset. Beyond this consideration, the yellow metal, due to its so-called “antifragile” nature—strengthening in times of market stress—also plays a key role in portfolio resilience.

If the recent upward movement in gold prices towards $3,000 proves to be yet another early warning signal of a major upheaval, this “antifragility” will be even more necessary in investors portfolios.

A Dynamic Approach to Gold Is Essential

Gold must be managed dynamically, which requires specific technical expertise. First, in its physical form, gold generates no yield. Additionally, it is a highly volatile asset whose price is influenced by numerous factors due to diverse demand sources, including jewelry, technology, central banks, and investors.

An active approach generates value but requires a granular understanding of economic cycles, the ability to adapt to market parameters, and deep knowledge of the various players involved.

Optimized Gold Exposure

The best approach likely involves an alternative strategy combining a core holding of actively managed physical gold, with an “overlay” layer to adjust exposure using leverage or protective instruments. These same instruments also allow for yield extraction, addressing one of gold’s main drawbacks.

What Share of a Portfolio Should Be Allocated to Gold?

Too often underweighted at 5% of portfolios, gold cannot fully express its potential at such a low allocation. Over the past 50 years, the optimal allocation to maximize the Sharpe ratio would have been 31% in equities, 47% in bonds, and 22% in gold. Over the last 10 years, the optimal allocation would have been 60% in gold, 40% in equities, and 0% in bonds.

Gold is more than just an inflation hedge; it is becoming a central component of a resilient allocation strategy in the face of upcoming monetary and economic disruptions.