Why Central Banks Are Increasing Gold Reserves: Geopolitics, Dollar Risk, and the New Global Monetary Order

Geopolitical Fragmentation, Dollar Risk Reassessment, and a Structural Redefinition of Reserve Management

1. Introduction: Why Are Central Banks Increasing Their Gold Holdings?
2. Background Factor (1): Reassessment of Risks in US Dollar Assets
1. 2.1. US Treasuries are no longer perceived as risk-free in absolute terms
2. 2.2. Rising interest rates have created valuation losses for reserve portfolios
3. Background Factor (2): Geopolitical Fragmentation and the Escalation of Sanctions Risk
1. 3.1. The freezing of Russia’s foreign reserves was a watershed moment
2. 3.2. Gold cannot be frozen, sanctioned, or defaulted on
4. Background Factor (3): Evolution of the International Monetary System (IMS)
1. 4.1. The gradual move away from SWIFT dependency
2. 4.2. BRICS currency discussions and gold-backed settlement proposals
5. Background Factor (4): Redefining the Purpose of Foreign Reserves
6. Background Factor (5): Accelerated Gold Accumulation by Middle Eastern Energy Exporters
7. Global Economic Implications of Rising Official-Sector Gold Demand
8. Conclusion: Gold’s Rise Is Structural, Not Cyclical

1. Introduction: Why Are Central Banks Increasing Their Gold Holdings?

Over the past decade, and especially since the mid-2020s, central banks across both emerging and advanced economies have significantly increased their gold reserves. This is not merely a reaction to price trends. It reflects a deeper, structural reassessment of:

the reliability of the US dollar and US Treasuries,
geopolitical fragmentation and sanctions risk,
shifts in global settlement systems, and
a redefinition of what foreign reserves are meant to achieve.

Gold has re-emerged not as a speculative asset, but as a strategic reserve instrument, particularly suited for an era of geopolitical uncertainty and financial system bifurcation.

2. Background Factor (1): Reassessment of Risks in US Dollar Assets

2.1. US Treasuries are no longer perceived as risk-free in absolute terms

For decades, US Treasuries were the unquestioned anchor of global foreign reserves. However, several developments have eroded the perception of their absolute safety:

Political gridlock in Washington and repeated near-misses with the debt ceiling
Rapid expansion of US fiscal deficits
Rising interest payments on federal debt
Concerns about long-term fiscal sustainability
The increasing use of financial sanctions by the United States

Central banks began recognizing that Treasuries carry both price risk and political risk, leading to a reassessment of the traditional “risk-free” narrative.

2.2. Rising interest rates have created valuation losses for reserve portfolios

As interest rates surged in the early 2020s, central banks holding large Treasury portfolios experienced significant mark-to-market losses. This prompted a structural question:

Should a reserve asset be judged on its yield, or on its ability to preserve value?

Given gold’s negative correlation with interest rate cycles and its independence from sovereign credit, gold increasingly functions as a stabilizer within reserve portfolios.

3. Background Factor (2): Geopolitical Fragmentation and the Escalation of Sanctions Risk

3.1. The freezing of Russia’s foreign reserves was a watershed moment

In 2022, Western nations froze roughly USD 300 billion of Russian central bank reserves. This action demonstrated for the first time in modern history that:

reserves held in foreign custodial accounts
denominated in foreign currencies

are not politically inviolable.

This profoundly shifted the perception of reserve safety across BRICS countries, the Middle East, Africa, and parts of Asia.

3.2. Gold cannot be frozen, sanctioned, or defaulted on

Gold’s strategic value has increased because:

it can be stored domestically,
it does not depend on foreign custodians,
it has no issuer and thus no default risk,
it cannot be blocked through sanctions.

In a world where reserve assets are increasingly weaponized, gold serves as the ultimate anti-sanction asset.

4. Background Factor (3): Evolution of the International Monetary System (IMS)

4.1. The gradual move away from SWIFT dependency

Countries such as Russia, China, India, and Gulf states are building parallel payment structures to reduce reliance on SWIFT, which is tightly connected to US-EU sanction policy.

Gold plays a role here as:

a settlement anchor,
a neutral store of value acceptable across geopolitical blocs,
a hedge against currency-specific payment disruptions.

4.2. BRICS currency discussions and gold-backed settlement proposals

The expansion of BRICS (including Saudi Arabia, UAE, Iran, Egypt, and others) revived discussions about:

gold-linked trade settlement mechanisms,
non-dollar denominated payment networks,
long-term alternatives to the dollar-centric system.

Central banks boosting gold reserves are, to some degree, preparing for a multi-polar monetary environment.

5. Background Factor (4): Redefining the Purpose of Foreign Reserves

Traditionally, reserve assets served three purposes:

Ensure import financing
Defend the domestic currency
Support international confidence

But in the 2020s, new priorities emerged.

5.1. Balance-sheet stabilization

Gold provides strong diversification because it has low or negative correlation with major reserve currencies and global bonds.

5.2. Long-term value preservation

Unlike fiat assets, gold’s purchasing power has been remarkably stable over centuries. In an inflationary or high-debt world, this becomes attractive for sovereign reserve managers.

5.3. Protection against political and systemic shocks

Geopolitical shocks, sanctions, banking crises, and currency disputes all highlight the need for unencumbered assets that retain value in extreme conditions.

6. Background Factor (5): Accelerated Gold Accumulation by Middle Eastern Energy Exporters

Oil-exporting nations—including Saudi Arabia, UAE, Qatar, and others—have increased their gold purchases for several reasons:

Diversification ahead of the post-oil era
Growth of yuan-denominated or rupee-denominated energy trade
Long-term hedging against the potential erosion of the petrodollar system
Strengthening fiscal resilience in anticipation of volatile oil markets

These countries’ fiscal surpluses provide ample liquidity to increase gold reserves steadily.

7. Global Economic Implications of Rising Official-Sector Gold Demand

7.1. The US dollar will not disappear, but structural decline in dominance is underway

Network effects keep the dollar dominant. However, diversification into gold signals a long-term soft erosion of dollar concentration in global reserves.

7.2. A more fragmented international financial landscape

As BRICS+ and Middle Eastern countries accumulate gold while building alternative settlement systems, the world is moving toward:

a bi-polar or tri-polar reserve structure,
reduced uniformity in reserve management practices,
more pronounced east–west financial fragmentation.

7.3. Long-term upward pressure on gold prices

Central banks are now among the largest net buyers of gold globally. Persistent structural demand from sovereign actors places a durable floor under gold prices.