It is a simple enough question, but the answer is often hard to come by. A pension provider here, a wealth manager there, perhaps a reassuring nod to government policy somewhere in the background. It is not uncommon for people to bury their heads in the sand and assume ‘someone else’ knows enough about markets and investing, to just manage this kind of thing for them.
This week offered two reminders that such an approach can be misplaced.
Just a few days ago, at the Savoy in London, I heard the chief investment officer of the UK’s largest wealth manager speak before a room of investors. He spoke with confidence about resilience. The list of risks was long and entirely recognisable. War, inflation, political instability, the late stage of the economic cycle. All acknowledged, all neatly framed within a narrative that suggested things were, broadly speaking, under control.
A deep recession, he told the room, remains unlikely. The base case is most likely a soft landing. The correct response is discipline. Diversification. A well-constructed portfolio designed to absorb shocks rather than react to them. Other than the ‘soft landing’ expectation, there wasn’t much for me to take serious issue with there, I didn’t think. We regularly discuss the need for discipline and diversification when managing your portfolio.
And then he went on.
The suggested approach to managing risk was equally familiar, to the majority of Western portfolio managers. Spread exposure across different governments. Hold a diversified mix of bonds. Pay attention to currency risk. Avoid making decisions during periods of volatility. In short, remain invested in the system, just a little more carefully distributed across it.
No mention of gold, i.e. that one asset that sits outside the system.
If the largest wealth manager in the UK is not even considering gold as part of a diversified portfolio, then one has to wonder what exactly is being diversified, and against what?
It’s not exactly an unreasonable question, is it?
Because if the risks being identified stem from rising debt, currency pressure and political instability, then addressing those risks solely through further exposure to the same structures requires a significant degree of trust.
Trust in governments to manage their obligations. Trust in central banks to maintain currency stability. Trust in financial institutions to adapt their frameworks when conditions change.
And yet, sitting there, listening to this carefully assembled framework for resilience, one could not help but think back to another moment when confidence in the system felt equally misplaced.
The late 1990s, when Gordon Brown announced he planned to sell over 50% of the UK’s gold reserves. This week was the anniversary of that decision. This should serve as a reminder that decisions made with confidence can age poorly. The current fiscal position of major economies suggests that the margin for error may be narrower than many would like to admit.
At that time, Brown’s reasoning was entirely consistent with the thinking of the day. Gold was unproductive. Bonds offered yield. Foreign currencies provided flexibility. The global financial system had evolved, and reserve management was evolving with it.
Selling at the bottom of the market has since become a case study in poor timing, though timing was never really the issue. The decision reflected a broader belief that policymakers and institutions had reached a level of understanding that allowed them to manage value more effectively than the market itself. That they could optimise, rebalance, and improve upon what had previously been considered a core store of wealth.
Has much changed amongst the investment establishment?
Fast forward to today and we are once again being told that risks are understood, that portfolios can be constructed to withstand them and that diversification across governments offers a sensible way to manage exposure.
All of which would be reassuring, were it not for the fact that the underlying conditions appear rather less stable than the frameworks suggest.
In the United States, federal debt has now surpassed 100 per cent of GDP. This is often presented as a technical milestone, though in reality it signals something more fundamental. The system requires constant expansion. It depends on continued borrowing, continued issuance, and continued confidence from those willing to fund it.
Against that backdrop, the idea that one can mitigate risk by holding a broader range of government debt begins to feel slightly circular.
Diversified, perhaps but it’s not exactly independent of the system.
Which makes the absence of gold from these discussions all the more curious. Here is an asset that has, for centuries, served precisely the purpose that modern portfolios claim to pursue. It has preserved purchasing power through inflationary periods, provided stability during geopolitical upheaval, and offered a form of wealth that exists beyond the reach of any single government’s balance sheet.
And yet, in a room dedicated to resilience, it did not feature.
And so we return to the question, who do you trust with your wealth?
A government whose balance sheet continues to expand? A wealth manager whose models assume that diversification within the system provides sufficient protection? Or an asset that requires neither assumption nor reassurance, and has quietly endured through each iteration of both?
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