“Gold is money, everything else is credit” – J.P. Morgan
Last week, the price of gold surged to another record high. While much of the buying has come from rattled investors seeking the safety of haven assets, there's another key driver: central banks are buying gold at unprecedented levels, spurred in part by de-dollarisation.
As the geopolitical landscape fractures, central banks are ramping up bullion purchases to diversify reserves, driven by growing concerns over reliance on the US dollar.
In trying to understand gold’s ascent, the emergence of a multi-polar world and a potential sunset of the Pax Americana era, it is important to understand the history of the US dollar and its role as a reserve currency.
Figure 1. The price of gold has surged to a new record
Source: Bloomberg as at 28 April 2025.
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For decades, the US dollar has been, and remains, the dominant currency in international trade and the primary global reserve currency. The US government’s substantial current account deficit has enabled the rest of the world to earn the dollars needed to facilitate trade.
Stable regime
Current account surpluses are recycled into the US Treasury market, creating a flow of capital that has enabled the US to fund its budget deficit. For decades, participants in this system and holders of US debt have relied on a stable reserve regime underpinned by the rule of law.
Stability has been further supported by an independent Federal Reserve, which ensures market liquidity and stability. The US dollar served as the foundation of an open global trading system, backed by the economic and military strength of the US government. This framework allowed the US to sustain both fiscal and current account deficits for decades.
However, the impartiality of the US dollar has been eroding in recent years. While US president Donald Trump's recent trade policies have drawn signficant attention, the weaponisation of the US dollar has been a bipartisan strategy, pursued across multiple presidential administrations.
Weaponisation of the dollar
One of the most prominent examples occurred when Russia invaded Ukraine in 2022, prompting the US to freeze Russia and its allies out of the US dollar and SWIFT payment systems. This foreign policy playbook has been applied to numerous other nations, including Iran and North Korea. Over the past 20 years, official sanction designations have risen more than tenfold, with no other country imposing financial penalties on a similar scale.
While past financial sanctions were largely limited to addressing violations of global norms, recent measures have increasingly been used to advance US trade and foreign policy interests. The dollar’s dominance as the global reserve currency has turned it into one of the most powerful weapons in the US’s arsenal.
What has the impact of this dollar weaponisation been? The war in Ukraine accelerated de-dollarisation, as central banks worldwide witnessed Russia's dollar reserves being effectively wiped out overnight. Central banks have been net buyers of gold since 2009, but have been ramping up purchases more recently, with 2024 marking a record as they added over 1,000 tonnes to their reserves.
A 2024 World Gold Council survey revealed that nearly 70% of central banks plan to increase the share of gold in their reserves over the next five years, reflecting a deliberate shift away from US dollar holdings in the face of growing geopolitical and financial risks. Importantly, this surge in bullion buying spans a broad range of countries, not just those at odds with US interests. The top three buyers in 2024 were Poland, Turkey, and India. That said, the US dollar remains the cornerstone of global trade and finance, and we do not expect it to lose its status as the world’s reserve currency anytime soon.
Figure 2: Quarterly central bank gold demand in tonnes
Source: World Gold Council as at 31 December 2024.
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How much more gold could central banks buy? Gold currently accounts for approximately 18% of total global reserves, but excluding major Western holders such as the US, Germany, France, and Italy, this figure drops to just 11%. Despite recent record purchases, gold’s share of global reserves remains near multi-decade lows. In the 1950s, gold made up over 70% of global reserves. If central banks were to move closer to historical norms, there could still be significant room for additional accumulation.
All data sourced from Bloomberg unless otherwise stated.
With contributions from Albert Chu, a Portfolio Manager focused on natural resources at Man Group and Angus Poland, an Equity Analyst at Man Group.
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