Gold has been a major player in recent years, supported by a powerful combination of central bank buying, geopolitical uncertainty, fiscal concerns and declining confidence in traditional reserve assets. We continue to believe that the long-term case for gold remains intact. However, we believe the risk balance for the coming quarters has become more balanced. This was underlined by Matt Bance, Solutions Strategist and Portfolio Manager, T. Rowe Price, explaining that a significant part of the bullish structural thesis is now widely recognized and reflected in prices.
Gold: outlook remains positive
The European Central Bank’s recent report highlighting how gold has overtaken US Treasuries as the world’s largest reserve asset is an important milestone, but it is also evidence of how far the gold narrative has already progressed. Central bank demand remains an important source of support, particularly as countries seek to diversify reserves in an increasingly fragmented geopolitical environment, and we expect it to continue to be a relevant theme going forward.
That said, the near-term scenario is less favorable than in the early stages of the rally. Central bank demand moderated in the first quarter of 2026, while ETF demand also weakened. To some extent, this reflects the fact that gold competes for investor attention with sectors that currently feature stronger cyclical and structural growth narratives, particularly AI-related infrastructure. As a result, capital has flowed to AI beneficiaries and AI-related industrial commodities, such as copper, where demand is supported by tangible investments in energy, the electricity grid and data center infrastructure. At the same time, rising real yields have increased the opportunity cost of holding an interest-free asset like gold.
but more balanced perspectives
For these reasons, we have moved from an overweight position to a more neutral tactical position on gold. The long-term thesis remains compelling, but the current uncertainty surrounding Iran, energy markets and the political outlook risks limiting near-term upside potential.
Gold remains an important defensive asset with low long-term correlation to traditional asset classes. Its relatively high volatility also makes it capital efficient in portfolio construction, meaning relatively small allocations can still provide significant diversification benefits. However, the current environment in the Middle East highlights how gold may struggle in certain geopolitical scenarios.
T. Rowe Price’s view
Conventional thinking suggests that rising tensions should support gold. However, tensions involving Iran have also pushed oil prices higher. Rising energy prices have strengthened inflation concerns, supported the U.S. dollar and contributed to expectations that interest rates could stay higher for longer. These factors tend to be drags on gold.
Focus on Central Banks
The history of central banks is equally multifaceted. Central banks have been one of the strongest sources of demand for gold in recent years, but demand is not necessarily one-way. While investors have become accustomed to focusing on central bank purchases, the significant reduction in Turkey’s reserves following the outbreak of conflict in Iran serves as a reminder that gold can also be sold or mobilized when countries face financing, currency or balance of payments pressures. This does not undermine the case for strategic reserve diversification, but suggests that central bank demand may be less favorable than in recent years, at least until the Iranian situation is resolved.
These dynamics also reduce some of the attractiveness of gold diversification in the short term. More recently, gold has become increasingly sensitive to the same oil price and inflation dynamics that influence broader markets, meaning its behavior may be more correlated with other assets than investors expect.
In this context, we continue to believe that gold deserves a place in diversified portfolios, but its role is different from that of bonds or cash.
Cash and high-quality bonds now offer something that has been largely absent for much of the post-financial crisis period: positive real returns. This makes them increasingly attractive defensive assets in their own right. If economic growth slows materially, bonds may ultimately prove to be the most effective hedge. However, as long as inflation remains the market’s primary concern, the benefits of bond diversification are much less certain, in our view. As a result, we currently favor liquidity over duration.
