Fidelity International has doubled its gold allocation to a self-imposed ceiling of 5 percent, as a sustained bond market selloff and fading confidence in the Federal Reserve's willingness and ability to tackle inflation appear to be drawing at least some Western institutional investors back toward the yellow metal.

The timing is notable for the make-up of gold demand. In recent years, the metal's advance has been powered largely by central banks, which have bought more than 1,000 tonnes of gold a year since 2022 — a record-setting pace documented by the World Gold Council — while Western institutional money has been slower to return. A manager of Fidelity International's scale rebuilding a gold position suggests that demand base may be starting to broaden beyond official-sector buying.

In a recent interview, Fidelity International portfolio manager George Efstathopoulos said he doubled the fund's gold holdings, taking the position to its self-imposed maximum of 5 percent. He added that he would consider raising the limit if the dollar's safe-haven status continues to decline.

London-based Fidelity International — not to be confused with Fidelity Investments in the U.S. — has $565.7 billion in client assets under management and serves around 2.5 million customers.

The firm had trimmed its gold holdings earlier this year as the yellow metal corrected and traded sideways following the onset of the U.S.-Iran conflict. According to Bloomberg, Fidelity funded its recent accumulation of gold with cash on hand and by selling high-yield bonds, including gilts (UK government bonds). Efstathopoulos said the fund began building the position after the bond selloff that followed the Federal Reserve's July meeting.

At that meeting, Federal Reserve Chairman Kevin Warsh and his colleagues once again held rates steady even as they continued to talk tough about fighting inflation. Markets appear to be paying more attention to what the Fed does than to what Warsh & Company says, and with no action forthcoming, the long end of the Treasury yield spiked yet again after the Fed's (non) policy announcement last month.

That reaction indicates investors have little faith in the central bank's willingness or ability to anchor price inflation at 2 percent — the goal the Fed formally adopted as its official target in January 2012. As a CNBC report put it: "We think you're going to keep short-term policy rates in check, and it's going to create a ton of inflation later."

This was exactly the point Efstathopoulos made in his interview: "My translation of [the post-meeting bond selloff] is the lack of Fed credibility and more policy uncertainty."

Gold has rallied since that Fed meeting, with the latest leg up driven by a failed attempt by the U.S. Treasury Department to intervene and prop up the bond market with a more aggressive buyback of long-term Treasuries. Efstathopoulos said the buyback looked like "an attempt to manipulate the yields, rather than dealing with the source of why yields are moving higher."

Because gold generates no income, climbing yields normally raise the opportunity cost of holding the metal — which makes the current dynamic unusual. "Gold now is less focused on yields rising, but why yields are rising," he said.

Gold is up nearly 14.8 percent since the beginning of August and is trading at a 3-month high. The metal has also climbed above the technically significant 200-day moving average, a level chartists often treat as the dividing line between long-term uptrends and downtrends. Efstathopoulos, for his part, has tied any further increase in the allocation to the dollar's continuing decline as a safe haven — leaving the currency's status, alongside the Fed's effort to restore credibility on inflation, as the thread to watch from here.