FTSE Russell believes that as global central bank buying continues to strengthen, the fundamental investment logic of gold has changed. Although rising bond yields still weigh on gold prices, investors should no longer mechanically apply the traditional relationship between gold and interest rates. Indrani De, Global Head of Investment Research at the institution, pointed out that both nominal and real yields are climbing, which theoretically raises the opportunity cost of holding non-interest-bearing gold. However, structural shifts in demand within the current gold market are weakening this impact.

Central Bank Purchases Reshape Gold Pricing

De stated in an interview that central banks have become an increASIngly important buyer in the gold market, which is one of the key reasons gold has become less sensitive to real yields. She recalled that central banks were net sellers of gold from 2000 through the global financial crisis, before turning into net buyers, and the pace of gold purchases has accelerated markedly in recent years.

"Over the past two to three years, central bank gold purchases have more than doubled the total seen between 2010 and 2021," she said. She added that official buyers generally do not adjust their allocations based on the opportunity cost from rising bond yields like private investors do, forming a source of demand that is relatively decoupled from yield movements.

De explained that a substantial portion of gold demand now comes from capital insensitive to yields, which explains the visible decoupling between gold prices and climbing yields. She also noted that at current valuation levels, the total gold held by central banks worldwide exceeds US Treasury securities.

Reserve DiveRSIfication Rather Than Abandoning the US Dollar

Meanwhile, De mentioned that the US dollar’s share of global foreign exchange reserves has trended structurally lower, from slightly above 70% at the turn of the century to the current 55%–57%. Still, she does not believe this means central banks are losing confidence in the US dollar.

She emphASIzed that the dollar’s dominant status has not been fundamentally challenged, as no alternative asset can match its scale for the time being. She framed this shift as a gradual diveRSIfication of global reserve assets amid evolving geopolitical and economic conditions.

De expects official-sector gold demand will remain a key feature of the market. While future purchase volumes may retreat from the abnormally high levels of recent years, she believes central bank demand remains broad-based across regions such as ASIa and Latin America, and geopolitical uncertainty is unlikely to disappear in the short run.

Beyond central banks, investment demand from retail investors and gold-backed exchange-traded products (ETPs) is also rising, meaning the base of buyers in the gold market is expanding. De said gold still functions as a hedge against inflation and geopolitical risks, and its stability stands out amid market fears of currency depreciation.

Rising Yields Are Not Entirely Bearish

Though higher yields remain a risk for gold, De reminded investors to examine the drivers behind rising yields. She noted fiscal concerns in advanced economies as one factor, and the current environment shows increASIngly obvious "fiscal dominance", meaning fiscal policy exerts greater influence over monetary policy.

Yet she also argued that not all yield increases are bad for gold. De said the global economy is moving away from the era of abundant cheap capital after the global financial crisis. Capital is becoming scarcer as sectors including artificial intelligence, infrastructure investment, manufacturing reshoring and the global green energy transition create more productive uses for capital.

She believes this repricing of capital may eventually help boost productivity, while higher financing costs will pressure inefficient "zombie enterprises". "There are many valid reasons for yields to rise, and we need to pay attention to that," she said.

Commodities Benefit from Energy Transition

De also pointed out this shifting investment environment benefits not only gold but also other commodities. She mentioned currencies linked to major commodity producers have strengthened, including the Norwegian krone, Australian dollar, Brazilian real and Mexican peso, signalling that commodities are gaining importance in global markets.

Copper in particular stands to gain from these structural trends. Traditionally viewed as a gauge of global economic activity for its wide industrial applications, copper now also benefits from new demand driven by AI infrastructure and the energy transition. De stated the world is entering an environment where "commodities will play an important role", not just gold.

She also believes the energy transition may become another long-term source of commodity demand. Turmoil in global energy markets has strengthened the link between energy security and economic security. She noted refined product prices are under even heavier pressure than crude oil, highlighting risks from over-reliance on single energy sources and fragile supply chains.

De said growth in the global electric vehicle and battery industries shows the green transition is actually accelerating this year rather than slowing down. "The more diveRSIfied energy security is, the better," she added, noting the transition "has picked up speed this year".

Investors Adopt the "Barbell Strategy"

De concluded that the current investment landscape is moving beyond the traditional binary choice between risk-on and risk-off, toward portfolio allocation that seeks growth participation while hedging complex risks. She pointed out capital flows over the past three to six months show investors are adopting a kind of "barbell strategy": on one hand, they continue to hold US and global equities to bet on the AI growth story; on the other hand, they buy high-quality short-duration and intermediate-duration investment-grade fixed income assets to preserve capital and maintain liquidity.

"We are clearly in an era where diveRSIfication delivers excess returns," De said. "At this point in time, diveRSIfied allocation is indeed working."