Central banks favour gold over dollar for reserves, WGC survey

A World Gold Council survey indicates that central banks globally anticipate increasing their gold holdings as a proportion of their reserves over the next five years, while simultaneously expecting a decrease in their dollar reserves. The survey, which included responses from 73 central banks, revealed that 76% expect higher gold holdings in five years, driven by gold's performance during crises, portfolio diversification benefits, and inflation hedging; conversely, nearly three-quarters expect lower dollar-denominated reserves amid geopolitical and economic uncertainty, with potential trade conflicts and tariffs cited as relevant factors, particularly among emerging markets and developing economies.

Analysis

A recent World Gold Council survey highlights a significant strategic shift among central banks globally, with an increasing preference for gold reserves over U.S. dollar holdings. The survey, conducted between February 25 and May 20 and involving 73 central banks, revealed that 76% anticipate higher gold holdings within the next five years, an increase from 69% in the previous year. Concurrently, nearly three-quarters of respondents expect their dollar-denominated reserves to decrease over the same period, up from 62% last year. This trend is underscored by substantial gold accumulation, with central banks purchasing over 1,000 metric tons annually for the past three years, a notable rise from the 400-500 ton average in the preceding decade. The primary drivers for this increased gold appetite include its perceived performance during crises, its role in portfolio diversification, and its utility as an inflation hedge. This shift occurs against a backdrop of heightened geopolitical and economic uncertainty, with potential trade conflicts and tariffs being cited as relevant concerns by 59% of respondents, particularly those from emerging markets and developing economies (69% vs. 40% from advanced economies). The WGC notes that gold reached an all-time high of $3,500.05 an ounce in April, reflecting a 95% increase since February 2022. Looking ahead, a record 95% of surveyed central banks expect global gold reserves to increase over the next 12 months, up from 81% last year, indicating continued strong official sector demand.

Key Decisions for Investors

• Investors should recognize that sustained and increasing central bank demand for gold, driven by desires for crisis hedging, diversification, and inflation protection, is likely to provide ongoing support for gold prices.
• The clear trend of de-dollarization among central banks signals potential long-term headwinds for the U.S. dollar's role as the primary global reserve currency, which could impact currency markets and dollar-denominated assets.
• Given that geopolitical tensions, economic uncertainty, and trade conflicts are key catalysts for these shifts in reserve management, investors should closely monitor these macro factors and consider their implications for portfolio risk and asset allocation.
• Consider reviewing allocations to gold and other non-dollar assets as a strategic response to the evolving reserve currency landscape and the cautious global economic outlook indicated by central bank behavior, particularly for those with significant emerging market exposure.