‘The dollar is losing credibility’: why central banks are scrambling for gold | Gold

FFifteen minutes after takeoff, the president of Serbia’s central bank received the call: Millions of dollars’ worth of gold bullion, destined for a high-security vault in Belgrade, had been deposited on the runway of a Swiss airport.

Despite the extraordinary value of bullion in air transportation, fresh flowers, food and other perishable items still take priority. Jorgovanka Tabaković “We learned this the hard way” told a conference late last year.

Serbia is among a growing number of central banks that are rapidly amassing large gold stocks, upending decades of conventional economic logic and fueling a rise in gold prices amid rising geopolitical tensions. The price has risen to $4,643 (£3,463) per ounce this week, with analysts predicting it will break $5,000 this year, as Washington creates unease in financial markets by challenging the independence of the US Federal Reserve.

As Donald Trump tears apart the global rules-based order, official institutions (and private investors) are racing to buy gold: the asset’s share of central banks’ reserves has doubled over the past decade to more than a quarter, the highest level in almost 30 years.

While this partly reflects the rising price of bullion, experts say central banks are filling their coffers as an insurance policy in an unstable world. Many are rushing to repatriate gold stocks held abroad, reducing their exposure to the US dollar.

“Geopolitically we have moved from Pax Americana to global conflict. When we see what the US is doing, it’s the law of the jungle,” says Raphaël Gallardo, chief economist at asset manager Carmignac.

“Private and government investors believe their strategic reserves are no longer safe in dollars because they could be seized overnight. The dollar is losing credibility as the nominal anchor of the global monetary system as the Fed loses credibility and the U.S. Congress loses credibility.”

Official reserves are a critical piece of the global currency puzzle. These currencies, which support national currencies as a type of security fund, generally consist of currencies such as the dollar, euro, yen and pound, as well as gold, bonds and International Monetary Fund assets. They are used to help maintain investors’ confidence and can also be used to stabilize exchange rates in times of stress.

For most of the past century, the dollar was the primary reserve currency of choice; the oil in the wheels of global finance and the medium of exchange in the majority of world trade.

Historically, the monetary system pegged currencies to the value of gold; countries committed to converting paper money into a fixed amount; It reflects thousands of years of obsession with the precious metal. But the link to the dollar, and with it other currencies pegged to the US currency under the 1944 Bretton Woods agreement, was broken by then-US president Richard Nixon during the economic turmoil of the 1970s. Since then, exchange rates have fluctuated depending on supply and demand in international money markets.

However, the status of the dollar is declining; This reflects Trump’s erratic policymaking, including interference with the Fed and fragile US public finances, as well as Washington’s readiness to impose economic sanctions. This includes targeting Russian central bank reserves after Vladimir Putin’s invasion of Ukraine.

The dollar is still down, but not out. This has fallen from about 66% of total central bank reserves a decade ago to about 57%. Economists say this is because there is no clear alternative. Other fiat currencies such as sterling, euro, yen or yuan lack global scale. As a result, institutions are turning to gold, the world’s oldest reliable store of value.

As an example of this, in June last year – with the influence of the rising bullion price – Gold surpassed the euro Becoming the world’s second most important reserve asset after the dollar.

“There is no replacement for the dollar. So gold shines by default,” says Gallardo. “What do people keep coming back to? [British economist John Maynard] Keynes called it the ‘barbarian remnant’ because it owed no one money.”

Nearly half plan to increase their gold allocations, according to a survey of 50 central banks by asset manager Invesco. Two-thirds also plan to move their bullion stocks outside their borders to domestic safes for security purposes.

“Gold has always been the ultimate safe haven. So in times of political uncertainty and instability you see the rise of gold for central banks. It’s sort of a hedge and a fallback point in case traditional fiat currencies fail,” says Rod Ringrow, head of government institutions at Invesco.

“The last four years have seen the concept of weaponizing reserves in the wake of the Russia-Ukraine conflict. So central banks have started to look at this and say: ‘If I want gold reserves, am I comfortable with them in-country or in other depositories?’. We’ve seen a changing pattern in that regard.”

Historically, many central banks held gold stocks in London, Switzerland and New York, centers of the global bullion trade with records of political and economic stability.

The Bank of England is the most important center in the world. In its vaults deep beneath the streets of London, which serve approximately 70 government agencies around the world, approximately 400,000 barsworth more than half a trillion dollars.

The clamor for central banks to repatriate their gold, and the difficulties this might involve, has come to the fore recently: Venezuela has $2 billion worth of bars locked in the Bank of England and cannot access them while the UK government refuses to recognize the Caracas regime. Russia also threatened Belgium, where most of Moscow’s frozen foreign exchange reserves are held.

Besides Serbia, governments seeking to repatriate gold reserves include: India, Hungary And Türkiye. Poland At the outbreak of World War II, London brought back hundreds of tons of gold bullion it had carried to the USA and Canada.

In the 2010s, Germany was an early pioneer of the return, amid political pressure to return thousands of tons of bullion from the United States and France, whose reserves had been moved during the Cold War due to fears of Soviet invasion.

Economists say the top gold-accumulating countries are often the ones most exposed to geopolitical tensions. Central bank purchases rose 10% through September, according to the World Gold Council, led by Poland, Kazakhstan, Azerbaijan and China.

Beijing has been on a buying spree in its attempts to rival Washington, amassing more than 2,000 tonnes of the material, estimated to be the sixth largest in the world. Although the contents of the Fort Knox vault have not been officially inspected since 1953, the United States is still thought to lead the world with more than 8,000 tons of supplies.

Other countries moved in the opposite direction. The UK government was a notable seller in the late 1990s and early 2000s, when Gordon Brown was Labor Chancellor, disposing of 401 tonnes of gold from its 715 tonnes holding at a time when gold prices were historically low.

Some economists believe cryptocurrencies may grow in importance to rival traditional currencies and gold as a reserve asset. But central banks have so far been cautious in a volatile and nascent market where security concerns remain and the most stable assets are still pegged to the value of the dollar or gold.

Economist Jonathan Fortun from the Institute of International Finance says that although gold is on the rise and cryptocurrency may follow, very few assets can rival the dollar yet.

“If we get to the stage where we swap gold, I don’t think dethroning the dollar will be the main concern. That would be a second round effect, we would have a lot of other problems.”