Central banks turn their backs on the dollar, embrace gold

Global central banks now hold more gold than US Treasuries for the first time in nearly three decades, according to Bloomberg’s latest analysis. The precious metal breached $4,000 per ounce for the first time in history on October 10, before shedding more than 6% of its value earlier this week after trade tensions cooled.

The surge in bullion prices culminated in a record $4,300 per troy ounce before the market experienced its steepest one-day drop in over ten years on October 21, Cryptopolitan reported. Despite the correction, gold is one of 2025’s strongest performing assets, up roughly 50% year to date.

Central banks take up Gold to counter market uncertainty

According to data compiled by Bloomberg, October saw a surge in gold-backed exchange-traded fund holdings, which hit their highest levels in more than three years. 

Central banks have been net buyers of gold for 15 consecutive years, but their pace ticked upwards after Russia’s 2022 invasion of Ukraine. Western sanctions froze a large portion of Russia’s foreign reserves in geopolitical retaliation, prompting other central banks to diversify away from the US dollar and expand their gold reserves.

The World Gold Council reported that global central banks purchased more than 1,000 tons of bullion for a third straight year in 2024, holding roughly one-fifth of all the gold ever mined. 

Many of the most aggressive buyers are countries that were not part of the post-World War II Bretton Woods system, which established the dollar as the global reserve currency and underpinned by gold.

The People’s Bank of China (PBOC) has been adding to its holdings for 11 consecutive months through September. China’s central bank is also seeking to become a custodian for foreign sovereign gold reserves, Bloomberg reported. 

“China is playing a key role in the ongoing rise in gold prices because of central bank buying, arbitrage trading, and increased speculative and safe-haven demand among Chinese households,” wrote Torsten Slok, chief economist at Apollo Global Management, in a research note published last Tuesday.

Most of the world’s official gold is traditionally stored in the Bank of England’s vaults, which currently hold more than 5,000 tons of the global total.

Morgan Stanley Research recently revised its 2026 price forecast upward to $4,400 per ounce, from a previous estimate of $3,313. The new projection implies an additional 10% gain from early October levels.

“We see further upside in gold, driven by a falling US dollar, strong ETF buying, continued central bank purchases and a backdrop of uncertainty supporting demand for this safe-haven asset,” said Amy Gower, Metals and Mining Commodity Strategist at Morgan Stanley.

The metal has a long history of performing bullishly during periods of market turmoil, having crossed psychological thresholds in each major crisis over the past two decades. It accelerated past $1,000 an ounce during the 2008 financial crisis, clocked $2,000 during the Covid-19 pandemic, and surged to $3,000 after President Trump’s Liberation Day tariff escalations in April this year.

Tariffs, inflation, and Fed rates cut optimism 

According to the World Gold Council, tariffs imposed by the Trump administration have increased import costs and raised the risk of higher consumer prices in the global economy. The POTUS’s public criticism of the Federal Reserve and his persistent calls for more relaxed rate decisions have shaken confidence in the central bank’s independence.

Investors expect the Federal Reserve to continue cutting rates this year as economic uncertainty mounts. Historically, gold prices have risen by about 6% on average within two months of the start of a Fed rate-cutting cycle.

“With all these factors, it probably comes as no surprise that gold is right up at the top of our order of preference among commodities,” Gower added.

The US dollar’s slide has been another factor behind gold’s ascent, because bullion is priced in dollars, and a weaker greenback makes gold more affordable to foreign investors. In mid-September, the dollar fell to its weakest level in more than three years against major global currencies.

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