The geopolitical environment deteriorated in parallel. The Russian invasion of Ukraine in 2022 and the freezing of foreign-exchange reserves underscored the political dimension of sovereign assets. In this context, gold’s lack of counterparty risk and independence from any single issuer regained strategic relevance. After decades of net sales, central banks have become net buyers of gold, particularly among countries seeking to reduce USD exposure.

Emerging markets’ attitude towards gold

This shift in official reserve management reveals a deeper divergence in how gold is cognitively framed across different monetary cultures.

The renewed accumulation of gold by central banks in recent years highlights a structural divergence. While Western portfolio construction has progressively marginalized gold over the past four decades, i n many emerging markets gold has retained a more central monetary role. In contrast to developed markets, episodes of currency instability, e.g., hyperinflation, and financial repression have been more frequent and more recent in emerging markets. In such environments, the assumption that sovereign debt instruments or foreign-currency reserves are immune from political risk has never been as deeply embedded in investor expectations. Gold has therefore retained its role as a strategic asset.

This divergence is visible in official sector data. As discussed in the chapter “The Status Quo of Gold Demand” in the In Gold We Trust report 2024, The New Gold Playbook, the increase in central-bank gold holdings has been driven almost entirely by emerging markets. Concerns about systemic financial risk and sanctions are cited as key motivations for holding gold, as we discussed in the chapter “Status Quo of Gold Demand and Gold Supply” in the In Gold We Trust report 2025, The Big Long. These motivations are largely absent among developed-market peers. From West to East, gold is thus embedded in different narratives.

The In Gold We Trust report 2024 described this shift as the emergence of a New Gold Playbook, arguing that structural changes in the monetary order require rethinking traditional allocation frameworks. In that framework, official-sector demand and reserve reallocation play a central role in gold’s price dynamics. To date, these forces are disproportionately concentrated in emerging markets, reinforcing their growing influence on marginal price formation.

At the household level, the contrast is similarly pronounced. Physical gold demand is heavily concentrated in Asia and the Middle East, where jewelry and bullion function not only as consumption goods but as savings vehicles and intergenerational stores of value. In Western markets, by contrast, gold exposure is predominantly financialized through ETFs and typically remains tactical rather than strategic.^[1]

These differences do not reflect superior or inferior rationality. They illustrate how individual and collective behavior is shaped by historical and geographical experience. Heuristics emerge from repeated interaction with a particular environment. In the West, decades of disinflation, institutional stability, and strong bond performance trained investors to equate safety with sovereign debt. In many emerging markets, repeated exposure to currency volatility and geopolitical risk reinforced the intuition that tangible, non-debt assets deserve a structural role in wealth preservation.

The West-East contrast is therefore instructive. If gold remains embedded in the monetary imagination of many emerging markets, the persistence of its marginalization in Western portfolios cannot be explained solely by objective asset characteristics. It must also be understood as a consequence of historically reinforced investment heuristics. This brings us back to the central behavioral question: Why do such heuristics persist even after the regime that gave rise to them has changed?

Why Outdated Portfolio Heuristics Persist

Despite mounting evidence of macroeconomic, fiscal, and geopolitical change, Western portfolios have been slow to adapt. The persistence of traditional portfolio allocation frameworks in a markedly different environment raises a central question for this chapter: Why do portfolio choices continue to reflect the assumptions of a bygone regime?

Investors’ psychological aversion to gold was analyzed in the In Gold We Trust Report 2012, in the chapter “Why is gold such a highly emotional topic?”. Cognitive dissonance and normalcy bias play a central role in shaping investor attitudes toward gold. Cognitive dissonance arises when new information conflicts with established beliefs or past decisions. It is an unpleasant psychological state, and the mind naturally seeks to resolve such conflicts. Crucially, the “mandate” of the mind is not to model reality objectively, but to build and maintain a coherent narrative that protects the self. As a result, the least painful way to resolve cognitive dissonance is often to ignore new information or to force it into existing mental maps.

Normalcy bias, the tendency to underestimate the probability and impact of risks that have not materialized for extended periods, offers a clear illustration of this mechanism. After several decades characterized by low inflation, declining interest rates, stable geopolitics, and reliable stock-bond diversification, many investors came to treat these conditions not as historically contingent outcomes but as the most likely future state of the world. Risks such as a resurgence of inflation, a breakdown in stock-bond correlations, fiscal dominance, or the geopolitical use of financial sanctions were therefore implicitly assigned very low probabilities. Rather than being priced as structural possibilities, they were, and in many cases still are, dismissed as remote or implausible scenarios. Interpreting deviations from familiar conditions as temporary disturbances rather than structural changes is often the path of least psychological resistance.

System 1 and System 2

Building on Simon’s notion of bounded rationality, another Nobel Prize winner in Economics, Daniel Kahneman, argues that human decision-making is governed by the interaction between two cognitive systems. System 1 is fast, intuitive, and associative; it relies on heuristics, narratives, and familiar labels to navigate complexity. By contrast, System 2 is slower, effortful, deliberate, and analytical, and is capable, at least in principle, of questioning intuitive judgments through careful reasoning and evidence. In practice, however, rather than consistently overriding intuitive beliefs, System 2 often serves to rationalize conclusions already reached through System 1, particularly in complex and uncertain environments such as financial markets.

This framework provides a powerful explanation for the persistence of established investment heuristics. Cognitive limitations, i.e. Simon’s bounded rationality, shape the tendency to resolve dissonance by defending existing beliefs, while the dominance of System 1 over System 2 reinforces familiar narratives and decision rules. The key point is that, contrary to common expectations, not only intuitive but also analytic forms of thinking can be biased against information that contradicts familiar and reassuring beliefs. Investment behavior is no exception to this general pattern.

For investors who relied for decades on the 60/40 portfolio and neglected gold, acknowledging gold’s renewed relevance would imply admitting that prior convictions may no longer hold. Such admissions are psychologically costly, particularly when they threaten an investor’s self-image as rational and competent. Gold has more than doubled in price over the past couple of years, a move that many portfolio managers largely missed. At the same time, bonds have suffered a bear market from which they have never fully recovered. This experience may foster regret and discomfort, which System 1 seeks to neutralize by defending familiar and reassuring narratives.

Recent narratives upholding bonds

One such narrative is the idea that bonds returned to being a reliable portfolio diversifier in 2024–2025. After the historic drawdown of 2022, fixed income began delivering positive returns again as nominal yields reset higher. For many investors, this was sufficient evidence that the traditional 60/40 portfolio was still working properly.

It is precisely here that the psychological mechanisms described above become visible. By its very nature, System 1 seeks evidence that corroborates long-standing and reassuring visions of the world. After a painful 2022, bonds finally delivered positive returns in 2023 and 2025. The intuitive conclusion follows: The anomaly has passed; the old heuristic still works.

This is a textbook example of how normalcy bias resolves cognitive dissonance by selectively overweighting the evidence upholding a narrative that provides psychological closure. At the same time, the available evidence that may poke some holes in the beloved narrative is systematically downplayed. In this context, normalcy bias reduces, or even nullifies, the need to revisit uncomfortable structural questions.

From a purely arithmetic perspective, the “bonds are back” argument is not without merit. After more than a decade of a near-zero-yield environment, higher yields once again contribute meaningfully to total return. Yet, the improvement has been driven primarily by carry rather than by the structural forces that sustained bond performance for four decades. During the Great Moderation, the 60/40 portfolio was powered not only by income but by a persistent decline in long-term yields and a reliably negative stockbond correlation.

Today’s environment is qualitatively different. Capital appreciation in long-duration bonds remains limited, and the long end of the curve has stayed elevated and somewhat volatile. System 1 may focus on the opportunity to lock in bigger coupons for a decade or more. But at the same time, it may downplay, or utterly forget, that this state of affairs signals market concerns about stubbornly above-target inflation, fiscal dominance, and the durability of the USD’s safe-haven status.

A parallel narrative unfolded in the gold market. Gold’s advance through 2024 and 2025 was extraordinary. The yellow metal’s price increased by 65% in 2025 and, at its peak in January 2026, surged beyond USD 5,500 per ounce. The magnitude of the move challenged the long-standing marginalization of gold within many Western portfolios. Yet, the rally was followed by some volatility. In early 2026, the nomination of Kevin Warsh as Federal Reserve chair and a subsequent increase in margin requirements by the CME triggered a rapid correction. The move was abrupt, widely reported in the media, and psychologically salient.

Here again, System 1 framed this episode around previous long-standing convictions. The correction was seen not as normal volatility within a broader bull market but as confirmation that gold is inherently speculative and unsuitable as a core allocation. The prior gains were reclassified as excess, and the drawdown was treated as proof that the bull market might be over. For portfolio managers who had underweighted gold during its ascent, the episode offered convenient reassurance. The asymmetry in perception is striking, yet consistent with the insights provided by behavioral economics. Volatility in bonds is typically interpreted as temporary noise within a fundamentally stable asset class. Conversely, volatility in gold is often treated as evidence of intrinsic instability. Short-term price movements are thus granted very different interpretative weights depending on the asset.

From a structural standpoint, however, the forces underpinning gold’s rise did not disappear with a margin-induced correction. Elevated fiscal deficits, inflation uncertainty, geopolitical fragmentation, and concerns about currency weaponization remained intact. Yet System 1, seeking to resolve cognitive dissonance in the least painful way possible, seized on short-term gold volatility as validation of preexisting heuristics.

Institutional forces upholding bonds

The psychological mechanisms discussed above do not remain confined to the private decision-making process of retail investors. Cognitive dissonance, normalcy bias, and the reliance on familiar heuristics affect professional decision-makers just as much as individual savers. The crucial difference lies not in the presence of bias but in how it interacts with institutional structures.

For retail investors, these mechanisms operate most visibly through recency bias and attention-driven allocation. A substantial body of empirical research shows that retail flows tend to follow recent performance, e.g. the paper “All That Glitters: The Effect of Attention and News on the Buying Behavior of Individual and Institutional Investors”, by Brad M. Barber and Terrance Odean. Assets that have delivered strong returns in the recent past attract disproportionate inflows, while laggards are neglected. This dynamic is amplified by media coverage and social reinforcement. What dominates headlines and social feeds often dominates marginal capital allocation. Over the past decade, this pattern has repeatedly favored technology equities, thematic ETFs, and cryptocurrencies, which are assets that combine strong momentum with compelling narratives.

Gold, by contrast, rarely benefits from such “shiny object” dynamics. It lacks technological novelty or transformative innovation narratives. Its strongest relative performance typically occurs during episodes of macroeconomic stress or systemic anxiety, precisely when investors hope that instability is temporary rather than structural. As a result, gold often fails to capture retail enthusiasm during long equity bull markets; and when it rallies sharply, it is frequently dismissed as a temporary hedge rather than embraced as a structural allocation.

In professional investment environments, the same cognitive tendencies are present but operate differently. Institutional investors are not immune to recency bias or narrative reinforcement. They too formed their allocation frameworks during decades in which bonds reliably cushioned equity drawdowns and delivered steady returns. However, in institutional settings, cognitive biases are translated into collective behavior through benchmarking, peer comparison, and formal performance evaluation.

Within this framework, the efficient-market hypothesis (EMH) plays an important legitimizing role. By emphasizing the difficulty of systematically outperforming the market, EMH reduces the perceived benefit of deviating materially from prevailing consensus allocations. When performance is assessed relative to benchmarks and peers, this logic naturally fosters behavioral inertia and a degree of herd behavior. Under such conditions, remaining close to conventional bond-heavy portfolio structures can represent a rational strategy for portfolio managers, even when those allocations are no longer well aligned with underlying macroeconomic fundamentals.

Career and reputational risk further entrench this inertia. A portfolio manager who maintains a high allocation to bonds and delivers disappointing returns in line with the benchmark can plausibly attribute the outcome to broadly adverse market conditions. Alongside protecting one’s self-esteem, conformity offers a form of professional insurance: “I failed alongside most of my peers, so I didn’t do anything wrong”. Conversely, taking a contrarian albeit evidence-based stance, such as reallocating meaningfully toward gold or other commodities at the expense of bonds, exposes portfolio managers to disproportionate risk in the event of failure. Deviations from orthodoxy tend to be punished asymmetrically. If institutional incentives reward conformism, accepting a broadly shared real or relative loss is often preferable, as the risk of being wrong alone outweighs the potential reward of being right.

Retail and institutional investors therefore arrive at similar outcomes through distinct but related mechanisms. Retail investors are pulled by recency bias and attracted to assets that shine brightest in prevailing narratives. Institutional investors are constrained by benchmarking, model frameworks, and career risk that reward adherence to established structures. In both cases, gold remains structurally underrepresented, not necessarily because it lacks merit, but because it does not align naturally with the psychological and institutional forces that govern capital allocation.

How Heuristics Change

As seen, the vast majority of investors have negligible, if any, amounts of gold in their portfolios. It is therefore reasonable to conclude that, despite gold’s qualities, old investment heuristics that relegate gold to irrelevance are still in place. How can new, more adaptive heuristics replace the old ones? By now, the reader should be clear that empirical evidence alone does not win arguments. So, how can those individual and collective psychological forces that defend old beliefs be overcome? Gerd Gigerenzer’s ecological rationality framework provides a possible answer.

In his research paper “Why Heuristics Work”, Gigerenzer has documented how simple heuristics can match or even outperform complex predictive models due to their ability to exploit the regularities of the environment. However, the exceptionally long regularities that characterized the Great Moderation and that made the 60/40 portfolio arguably the most successful heuristic in the history of behavioral finance have been compromised. Bonds appear to have lost part of their ability to cushion equity drawdowns and, more broadly, some of their former safe-haven status. This raises the question of whether investors will abandon, or at least amend, the 60/40 portfolio heuristic.

First of all, investors must experience that the 60/40 portfolio is no longer delivering acceptable outcomes. Heuristics are kept or dropped based on feedback. For the 60/40 investor, this feedback arrives when the portfolio repeatedly disappoints on the outcomes they care about: preserving real wealth, limiting deep drawdowns, providing stable retirement income, and similar objectives. This feedback needs to be consistent and repeated through time. Otherwise, it may be dismissed as temporary.