The Curious Case of Gold

Scientists often describe gold as the “antisocial” element because it doesn’t react easily with other elements and is thus close to indestructible. This “antisocial” behaviour carries over into the financial markets.

Gold is typically viewed as a contrarian holding, which means it may perform well when other assets including broader equity markets are weak. That’s why investors have been seen to embrace it as a defensive asset in times of turmoil. Gold has also tended to perform well in rate cutting environments or during inflationary periods (although we think it’s debatable if gold is truly a good inflation hedge). So, which factors pushed gold to new records last year, just as equity markets scaled new dizzying heights?

To understand the unique environment driving its performance, it is important to step back and look at the whole forest and the long cycle (think rise-and-fall of empires versus traditional cyclical frameworks). Gold has evolved into an asset beyond a call on rates, inflation or defensive qualities. The world is entering a different geopolitical and geoeconomic paradigm which will underpin its performance over the coming decades.

New conflicts

The waning of Pax Americana manifests in many different sub-themes and each supports gold in its own way. One of the offshoots of geopolitical fragmentation is the new US-China AI arms race, with each side allocating enormous amounts of capital to build foundries, IP, power generation, etc. The tension is rooted in the US’s historic economic and manufacturing strategy, one where the US economy shed hard manufacturing and outsourced it to China as part of the move towards globalisation.

Under that model, the US then buys Chinese goods with freshly minted US dollars. China recycles those US dollars back into US Treasury purchases, thus creating a circular symbiotic relationship. Of course, we now know how that the story no longer ends there.

The loop only works as long as the US is content to give up manufacturing supremacy and if China is equally content with being seen an economic vassal funding the American consumer.

This decades-long relationship is now unwinding and as the Thucydides Trap¹ eventually predicts… once a vassal reaches a certain level of power, conflict will arise. Conflicts in today’s world are as commonly conducted via trade and technology as they are on a battlefield.

Structural tailwinds

This unwind is, in essence, the tailwind powering the structural rise in gold. For the US to fund the AI arms race and reshore manufacturing, most of the paths available to it (barring austerity and higher taxes, neither of which are supportive of getting politicians elected) have traditionally led to higher deficits, higher inflation, eroding dollar status and an eventual devaluation of the US Treasury and dollar market.

So for us, regardless of whether the US economy experiences growth or recession, inflation or deflation, the argument for owning gold (and other real assets) remains strong.

We believe that global central banks will continue to accumulate gold as a reserve asset (Figure 1) and the secular trends are firmly in place with few signs of structural abatement. As such, we continue to believe the outlook is positive for gold and it has a firm place in a portfolio.

Figure 1. Central banks will continue as one of the key buyers of gold

Source: International Monetary Fund and Bloomberg, as at 31 October 2025.

Problems loading this infographic? - Please click here

Expect volatility

However, we expect short-term volatility, especially given such strong performance in 2025. The near-term catalysts for gold continue to ebb and flow. On the one hand, investors have already baked in rate cuts and trade war headlines have faded for now. Physical armed conflicts in certain regions like the Middle East have reached a temporary calm while others like Ukraine are in phases of settlement.

On the other hand, new areas of geopolitical conflict have erupted. The most recent news of US intervention in Venezuela signals a continued fragmentation of the existing world order and the risk remains high of a possible contagion into other areas of the world such as other Latin American countries.

In the meantime, the supply and demand imbalance for industrial metals like copper, aluminum, steel and other critical minerals are accelerating with global monetary and fiscal stimulus. While we believe gold will likely remain very well supported and have a very attractive long-term investment thesis, the case for other metals and minerals may compete for investors’ attention in 2026. Stay tuned for our updates on these.

All data sourced from Bloomberg unless otherwise stated.

Author: Albert Chu, a Portfolio Manager focused on Natural Resources at Man Group.

¹ The Thucydides Trap describes the high probability of war when a rising power threatens to displace a dominant, established power, a dynamic Thucydides observed in ancient Greece between Sparta and Athens. It highlights how a ruling power's fear and an aspiring power's growing assertiveness often escalate tensions, leading to conflict, as seen in historical cases like the Peloponnesian War.