Central Banks Turn to Gold as Global Risks Rise

The gold market has seen significant changes in recent years, with its price performance becoming less predictable. Historically, gold was expected to perform well during periods of inflation, declining interest rates, or a weakening US dollar. However, since the current bull market began in 2018, gold has delivered double-digit annualized returns, even when real yields rose sharply between 2022 and 2023.

The reasons behind investors' growing interest in gold are shifting from traditional explanations to concerns about government debt, fiscal sustainability, geopolitical fragmentation, currency concentration, and the resilience of traditional investment portfolios. A key turning point came in 2022 when Western governments froze approximately $630 billion of Russia's foreign-exchange reserves.

Physical gold is not another party's financial obligation, unlike government bonds or foreign currency reserves, which makes it an attractive asset for central banks seeking diversification. According to the World Gold Council, central banks have purchased around 1,000 tonnes of gold annually over the past four years, roughly double the average pace of the previous decade.

The trend is driven by a structural reassessment of reserve allocation in an increasingly uncertain geopolitical and financial environment. Central banks are using gold to reduce reliance on traditional fiat currencies, particularly the US dollar, while enhancing resilience against risks. The World Gold Council's 2026 survey found that almost nine in ten reserve managers expected global central-bank gold holdings to increase over the following year.

Investors are also considering the potential for government debt and budget deficits to become unsustainable, leading to questions about how these obligations will be managed over time. Potential responses include higher taxes, reduced public spending, sustained inflation, financial repression, or continued borrowing at higher interest costs.