Herbert Hoover knew Western Australia’s goldfields long before becoming U.S. President in 1929. As a young mining engineer in the 1890s, he worked around Kalgoorlie, where his footprint remains today in the form of many landmarks, not least a grand mirror standing at the entrance of the iconic Palace Hotel.
His mining experience likely informed his famous remark, “We have gold because we cannot trust governments”, made around the time when President Roosevelt’s 1933 Emergency Banking Act forced Americans to convert their gold into US dollars during the Great Depression.[1]
Hoover’s blunt warning on trust belongs to another era, but the portfolio question it raises is current - while investors can trust the powerful role of governments and central banks, how much margin for error do they need to factor into their investment decisions?
Monetary and fiscal policies have substantial powers to regulate economic temperatures, control liquidity and respond to economic shocks, but in a world where uncertainty is the only certainty, even the best-designed policies may not go to plan. Investors have grown sceptical and more concerned about policy missteps or situations where measures may work less quickly, less completely or take an unexpected turn.
A broader set of possible outcomes is becoming more relevant to portfolio construction.
Only months ago, investors broadly anticipated interest rates falling. Instead, the US Federal Reserve raised the rate in September for the first time since 2023, joining several other central banks responding to renewed inflation pressure, including the Reserve Bank of Australia, which became the sixth G10 country to lift its cash rate in September. While shifting monetary policy can reinforce central bank credibility, the ultimate question is whether it will work.
Today’s policy challenges extend beyond inflation. Governments are weighing higher defence spending, industrial investment and the costs of securing supply chains (through friend-shoring and on-shoring), while servicing larger and growing fiscal debt obligations. The knock-on effects are huge. Trade relationships and currency assumptions are shifting. Each policy response may be rational on its own terms, but combined, they make the outlook for capex, growth and asset prices harder to predict – and correlations more nuanced, asset valuations (based on higher costs of capital) more volatile.
Bonds remain essential assets providing liquidity for issuers and income for investors along with protection when growth weakens (a win-win of sorts), but history shows that bonds and equities both come under pressure when inflation rises. Higher yields favour investors with newly purchased bonds while reducing the value of existing long-duration holdings. And the higher the cash rate, the more issuers need to compensate investors for their invested capital.
Repurchase programs and buybacks can improve liquidity and help the market function more smoothly, but in isolation, they cannot resolve investor fears about inflation, rising borrowing costs or the yield required to hold long-term bonds. Recent weak long-term Treasury note auctions suggest the US Treasury’s buybacks have done little to ease investor concerns about holding government debt, with US 30-year bond yields remaining at levels not seen since 2004.[2]
That is not to say that investors have lost faith in US assets. Foreign investors made record net purchases of US equities and investment fund shares in the year to July. Their net purchases of US debt securities, however, slowed from US$314 billion in the first quarter to US$188 billion in the second. Capital is still flowing into America, but investors are making distinctions between the risks they are willing to own.[3]
That creates a difficult balancing act for policymakers. Interest rates may need to stay high enough to contain inflation, even as higher yields increase the cost of servicing government debt. In the US, government debt stands at over US$40 trillion and is rapidly rising.
For investors, this raises a practical question: how can a portfolio diversify the faith and trust placed in policymakers and their ability to deliver expected outcomes in an increasingly chaotic world?
Many central banks, responsible for monetary stability, continue to add gold to their reserves alongside currencies and sovereign bonds. Their buying does not necessarily imply a lack of confidence in currencies or government bonds that remain central to reserve portfolios. It reflects the value of holding assets that respond differently when inflation, cash rates, exchange rates or geopolitical conditions depart from expectations.
Gold has a distinct role in that mix. Physical gold held outright has no issuer and carries no credit risk, giving investors an asset that does not depend on another party meeting a financial obligation. Reserve managers can therefore hold it alongside conventional assets as they plan for a wider range of outcomes.
Trust is a commodity that belongs in the diversification debate
Gold does not provide an income stream, and its price can fall, sometimes correcting sharply. Higher real interest rates and a stronger US dollar can raise the opportunity cost of holding it. Its retreat from its January 2026 peak was a useful reminder that gold does not rise automatically when geopolitical risks increase.
Its strategic role rests on a different proposition. An investor who fully trusts that inflation will return smoothly to target, fiscal pressures will be managed, and traditional portfolio relationships will hold may see little reason to add gold. But a portfolio built around those assumptions leaves little room for error.
Even modest scepticism about how events will unfold can make a case for holding some gold. Why? Because unlike almost all other financial assets, gold essentially sits outside the system as a non-debt-backed asset. Its dual nature as a highly sought-after consumer good as well as an investable asset attracts different buyers and sellers with different objectives. Its scarcity and unique profile underpin its ability to help protect and preserve long-term wealth. The case is strongest when gold is considered part of a diversified portfolio rather than as a prediction of events.
Diversifying trust
In today’s more global and interconnected market where valuation bubbles, bulging debt levels and inflation blowouts are mainstays, trust has become a critical factor in asset allocation decisions across the entire market spectrum. Lower levels of trust are driving a new ‘Fear’ acronym: FOMU – the Fear of Messing Up. This ‘fear’ may be of rates rising too little to bring inflation down, or so high that growth and financial conditions deteriorate. For an investor, it may mean building a portfolio that depends too heavily on policymakers getting every intensely difficult decision correct.
Investing in real assets such as gold can help a portfolio remain resilient when inflation, policy or markets take an unexpected path.
This was a choice denied to everyday US investors from 1933 until late 1974 while gold ownership restrictions were in place.[4] UK holders of certain types of gold were also subject to restrictions from 1947 to 1971. Being excluded from the market is one of the reasons Western investors have been so underinvested in gold.
It’s worth highlighting how well-placed Australia is to support gold’s role in financial markets. As the world’s third-largest producer of gold (behind net importer China and heavily sanctioned Russia), Australia supplies gold to investors and central banks worldwide who value mining safety and provenance. Increased production and sustained demand at elevated prices have lifted gold to Australia’s second-largest resource export, trailing only iron ore by a narrowing margin.[5]
Gold is once again an economic pillar for Australia and a trusted global asset at a time when investors are scrutinising the assumptions underpinning asset prices and valuations.
Notes
[1] Forbes, 20 August 2023: Gold Can’t Be Downgraded and It’s No One’s Liability
[2] ABC News, 27 Sep: Bond yields at two-decade highs in largest market correction in generations
[3] FT 26 Sep: Foreign capital flows into US stocks hit record as appetite for debt fades
[4] Historical Timeline of the U.S. Mint
[5] June 2026 Resources and Energy Quarterly
Shaokai Fan is Global Head of Central Banks and Head of Asia-Pacific (ex-China), at World Gold Council, a sponsor of Firstlinks. This article is for general informational and educational purposes only and does not amount to direct or indirect investment advice or assistance. You should consult with your professional advisers regarding any such product or service, take into account your individual financial needs and circumstances and carefully consider the risks associated with any investment decision.
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