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

Title: The Great Divorce: Why Central Banks Are Dumping the Dollar for Gold

It sounds like the opening scene of a thriller. Just fifteen minutes after takeoff, the governor of Serbia’s central bank received a heart-stopping call: millions of dollars in gold bars, destined for a high-security vault in Belgrade, had been simply left sitting on a Swiss airport runway. As it turns out, in the world of air freight, even precious metals get bumped for perishable goods like flowers and food. "We learned this the hard way," admitted governor Jorgovanka Tabaković at a conference late last year.

And Serbia is far from alone. In a move that defies decades of economic convention, a growing number of central banks are aggressively stocking up on gold. This global gold rush is helping drive prices to new heights, especially as geopolitical tensions simmer. With unease in financial markets already stirred by Washington’s challenges to the independence of the US Federal Reserve, gold recently smashed records to hit $4,643 an ounce. Some analysts are betting it could top $5,000 this year.

As Donald Trump continues to rattle the global rules-based order, both official institutions and private investors are making a beeline for gold. Over the past decade, the amount of gold in central bank reserves has doubled, now accounting for more than a quarter of their total holdings—the highest level in nearly 30 years. While the climbing price is part of the appeal, experts say it points to something deeper. Central banks are filling their vaults as an insurance policy against an increasingly unpredictable world, pulling their holdings from overseas storage, and deliberately cutting their reliance on the US dollar.

“We have moved from Pax Americana to global discord, geopolitically. It is the law of the jungle when we see what the US are doing,” explains Raphaël Gallardo, chief economist at asset manager Carmignac. “Investors—private and sovereign—believe their strategic reserves are no longer safe in dollar terms, as they can be confiscated overnight. The dollar is losing the credibility as the nominal anchor of the global monetary system because the Fed is losing credibility, and US Congress is losing its credibility.”

To grasp why this shift is so significant, you have to understand what these official reserves are. Think of them as a nation’s financial safety net. They’re typically a mix of foreign currencies (like the dollar, euro, and yen), gold, bonds, and other assets. Their main job is to keep investors confident and stabilize the national currency when things get rocky.

For most of the last century, the dollar was the undisputed king of this system, the essential oil that kept the engine of global finance and trade running smoothly. Currencies used to be pegged to the value of gold, but that all changed during the economic chaos of the 1970s when President Richard Nixon cut the dollar’s last ties to gold, bringing the Bretton Woods system to an end. Since then, exchange rates have floated freely.

But the dollar’s grip is loosening. Unpredictable policies, interference with the Fed, and the shaky state of US public finances have all played a part. So has Washington's readiness to use economic sanctions as a weapon, like when it froze Russia's central bank reserves after the invasion of Ukraine. As a result, the dollar's share of total central bank reserves has fallen from around 66% a decade ago to about 57% today. The problem, economists say, is that there’s no obvious replacement. Currencies like the euro, pound, or yuan simply don't have the global scale. So, institutions are turning back to the most ancient and trusted store of value: gold.

In a telling sign of this new reality, the surging price of bullion helped gold officially overtake the euro last June to become the second-most important reserve asset, trailing only the dollar. “There is no one to replace the dollar. So gold is shining by default,” says Gallardo. “People are returning to what [British economist John Maynard] Keynes called the ‘barbarous relic’, as it is nobody’s debt.”

This trend looks set to continue. A recent Invesco survey of 50 central banks found that about half plan to buy even more gold. More importantly, two-thirds of them are making plans to bring their existing stockpiles home from overseas vaults for better security.

“Gold has always been the ultimate safe haven. So in times of political uncertainty and instability you see gold spikes in terms of central banks. It’s a form of protection and a backstop if traditional fiat currencies fail,” notes Rod Ringrow, head of official institutions at Invesco. “The last four years have seen this whole concept of the weaponisation of reserves, after the Russia-Ukraine conflict. So central banks have started to look at that and say: ‘If I want gold reserves, am I comfortable with them in-country, or at other depositories?’. We’ve seen a shifting pattern in that regard.”

For decades, central banks stored their gold in the global trading hubs of London, Switzerland, and New York. Deep beneath London, the Bank of England’s vaults still hold around 400,000 gold bars—worth over half a trillion dollars—for some 70 institutions. But holding gold abroad is starting to look risky. Venezuela has $2 billion worth of gold stuck at the Bank of England, unable to access it because the UK government doesn’t recognize the regime in Caracas. Russia has also made threats against Belgium, where a large chunk of its own frozen reserves are held.

This isn't a fringe movement. Besides Serbia, countries like India, Hungary, and Turkey have been busy bringing their gold home. Poland repatriated hundreds of tons of gold it had sent to London, the US, and Canada for safekeeping at the start of World War II. Germany was a trailblazer in this trend back in the 2010s, moving thousands of tons of bullion back from the US and France, where it had been stored during the Cold War over fears of a Soviet invasion.

It’s no surprise that the countries buying gold most aggressively are often the ones feeling the most geopolitical heat. According to the World Gold Council, central bank purchases jumped 10% in the year to September, with Poland, Kazakhstan, Azerbaijan, and China leading the pack. Beijing, in particular, has been on a massive buying spree, adding over 2,000 tons as part of its strategic challenge to Washington's dominance. The US is still thought to be the world's largest gold holder with over 8,000 tons, though its famous Fort Knox vault hasn't been officially audited since 1953.

Of course, not everyone is jumping on the gold bandwagon. The UK famously did the opposite, selling off 401 of its 715 tons of gold under Chancellor Gordon Brown in the late 1990s and early 2000s—right when prices were at historic lows.

So, could cryptocurrencies be the next big thing in reserve assets? Some economists think it's possible, but central banks remain deeply skeptical of the new and volatile market. For now, even the most stable crypto assets are still pegged to either the dollar or gold. As Jonathan Fortun, an economist at the Institute of International Finance, puts it bluntly, if we ever reach a point where we're actually bartering with gold, the dollar losing its top spot will be the least of our problems. “That would be a second round effect—we’d have many other issues.”