Why Gold Is Replacing Treasuries in Reserve Portfolios

SEB (Skandinaviska Enskilda Banken), is a leading financial services group in Northern Europe. They published an interesting (if aggressive) comment on Gold vs Treasuries. Here is that analysis broken down with their original comments attached.

Contents

1. The End of a Longstanding Correlation
2. Treasuries Now Carry Political Risk
3. Quantifying the Risk: A 5% Political Discount
4. Gold’s Implied Risk Premium Is 5.7%
5. Strategic Drivers Ahead: US–China Conflict, Powell’s Successor
6. Gold as Core, Treasuries as Conditional

The End of a Longstanding Correlation

Historically, gold traded inversely to U.S. 10-year real yields. That relationship held for years, reinforcing the idea that gold was a simple reflection of inflation expectations. But the correlation broke decisively in Q1 2022. The turning point wasn’t a macroeconomic event—it was geopolitical.

Following the Russian invasion of Ukraine, Western central banks froze approximately $600 billion in Russian FX reserves, the majority of which were held in U.S. dollars and euro-denominated assets. The move shattered the assumption that sovereign reserves—even in the absence of default—were untouchable. It introduced a new axis of risk: political confiscation.

Treasuries Now Carry Political Risk

To reserve managers in Beijing, Riyadh, and elsewhere outside the G7 framework, the seizure of Russian reserves was a warning. It indicated that access to U.S. Treasuries is contingent on political alignment with Washington. From a portfolio construction standpoint, this amounts to introducing a “confiscation tail-risk” into what was once considered the world’s safest asset.

No formal default occurred. Yet for all practical purposes, the reserves failed. In a sanctions-driven world, the traditional safe haven becomes a conditional one. Holding U.S. government bonds now includes a non-trivial probability of being locked out of your own assets.

Quantifying the Risk: A 5% Political Discount

How do non-Western central banks internalize this new environment? The report offers a plausible scenario: they may now price in a 5% chance (1-in-20 odds) of bond confiscation. If such an outcome carries irreversible consequences, a rational actor would demand at least a 5% additional yield to offset the risk.

Continues here