VICTORY!
It is a pain in the ass to get it to work now, but it is possible!
Here are the steps to change the medallion of a sovereign:
1. Place the image in elemental\gfx\medallions\
2. Edit the CoreSovereigns.xml and add your new sovereign. You do not need to include the path when you specify the medallion picture.
3. Rebuild the data.zip. In windows 7 you will have to do this as an administrator.
4. Launch the game and enjoy.
This is inferior to the old way, where you went into documents\elemental\units and just edited the custom sovereign's <medallion> settings and it just worked. But at least it is still possible!