Why is gold looking more attractive?

Key takeaways

• Gold is becoming more attractive as inflation remains above target and bond markets continue to demand higher yields, reinforcing its role as a potential source of inflation resilience within portfolios.
• High government debt and large fiscal deficits in major developed markets increase the risk of policy errors, currency pressure or debt monetisation - an environment in which gold can offer diversification benefits.
• With equity markets still heavily concentrated in AI-related technology stocks, gold miners and broader real assets may offer opportunities for active investors seeking exposure outside dominant market themes.

We have written about the rise of AI related stocks and concentration risk recently; if technology stocks are dominating indices, it can mean that other sectors are being unfairly ignored despite strong financial results and attractive long-term prospects. With strong cashflows in the gold miners seemingly ignored, we see the potential for a small rotation away from tech into gold potentially having a very significant impact on gold-related share prices.  Just 1% of the five largest technology companies’ market capitalisation is equal to around 40% of the five largest gold miners’ equivalent size.

Gold miners – Follow the cash flow?

Cash generation is improving for gold miners while hyperscaler cash flow yields are stalling

FCF Yield: Gold miners vs. hyperscalers

Source: W1M, Bloomberg. Bloomberg consensus estimates and market capitalisations, August 2026.

Risk warning: Past performance is no guarantee of future results and the value and income from such investments and their strategies may fall as well as rise. You may not get back your initial investment. Capital security is not guaranteed.

At the beginning of the year, gold had rallied strongly to over $5,000 per oz; our Real Assets Fund had around 13% in gold related exposures and, taking profits, we reduced that to 11%; at the same time we took steps to mitigate potential losses so that if gold fell below $5,000 per oz, we would only suffer around half the losses. Those decisions have served us well as gold fell sharply this year but, in August, we removed the hedges we had in place and have added back to gold exposure. Why?

Inflation risk

While inflation is far from recent peaks post the invasion of Ukraine, oil prices are up year to date and central banks have not yet got inflation back to target levels around 2%. This week, US core CPI remained stubbornly above 3%. Bond markets in all the developed markets are demanding higher yields partly because of inflation risk. Both the UK and US are expected to have modest interest rates increases in the next year as a result. One reason to own gold is to increase inflation resilience in portfolios. If the costs of mining gold increase (wages, energy etc), ultimately the price of gold has to reflect that or supply contracts and that then increases the price of gold; this explains how gold can act like an inflation hedge.

Fiscal deficits, government borrowing and monetisation risk

The US, UK, Japan, France, Italy and Canada all have debt levels greater than 100% of their respective GDPs; Germany is close to two thirds of GDP. Relatively high levels of government borrowing and national debts have led to bond markets demanding higher yields which means higher interest rates paid by governments. The UK has accrued around £3 trillion of debt and pays around £10bn per month in interest currently. The US took 200 years to get to $1 trillion of debt in 1981 but the total now stands over $40 trillion, having doubled in the last decade with the pandemic, and the interest bill is over $1 trillion p.a. now. The US is set to borrow $2 trillion just this fiscal year. Unsurprisingly, bond markets require higher interest rates now that US debt is over 120% of GDP: The US Treasury has issued $25bn of bonds in 2026 paying around 5.2% p.a. over 30 years; that is the highest “yield” for more than two decades and shows market concern about significant fiscal deficits. In addition to bond markets demanding higher yields, currencies can come under pressure; despite higher yields / interest rates, the US dollar weakened marginally between in the last three months.

How does this environment favour gold?

Governments in a lot of debt and paying huge amounts in interest could be tempted to “monetise” debt or “inflate it away”. As explained above, if inflationary policy stances are taken or policy errors made, holding gold can provide inflation resilience.

Conversely, if western central banks were aggressive in trying to get inflation back towards 2%, higher interest rates would normally be negative for growth and employment and that is also negative for governments and not only because of the obvious impacts on people losing jobs and a higher cost of living for all. If growth and employment are negatively impacted by policies aimed at containing inflation, there is recession risk as well as likely falls in tax revenues; that increases deficits and the need to borrow to fund those deficits. Higher debt levels result and can lead to higher debt service costs as a percentage of GDP – which can lead to higher yields being demanded.

Rocks and hard places: Gold exposure can give portfolios resilience in all these circumstances.

What else is attractive about gold?

Apart from adding inflation resilience to portfolios, gold is, of course used in jewellery and industrial processes. In markets currently concentrating on AI-related stocks, we think the materials and energy sectors look under owned and therefore offer opportunities for active investors.

Real Assets and diversification

Our actively managed real assets investments include exposure to gold and property but are much more diversified than that. Metals such as copper and uranium have significant structural demand-drivers. Clean energy and investment in electricity generation and distribution are key for the future and offer long-term contracts which can increase the inflation resilience in portfolios.

Real Assets: Investing in the future – power, grid, and decarbonisation

Source: W1M. As at 31.12.25

Risk warning: The above is for example purposes only and should not be considered a solicitation to buy or sell a security. Differing market conditions may mean the above weightings will decrease or increase tactically.  

Conclusion

As we enter the final third of the year with more questions being asked about government spending and borrowing levels and with high levels of “concentration risk” in equity markets, the importance of diversification across equities, bonds, real assets,  absolute return and protection strategies remains key. Gold may, once again, prove to be resilient.

Glossary

• Inflation resilience: The ability of an asset or portfolio to better withstand periods when prices are rising and purchasing power is under pressure.
• Fiscal deficit: When a government spends more than it receives in revenue, typically requiring it to borrow to cover the gap.
• Monetisation risk: The risk that governments or central banks respond to high debt levels in ways that effectively reduce the real value of debt, often through inflationary policies.
• Concentration risk: The risk that a market or portfolio becomes overly reliant on a small number of companies, sectors or themes.