2025 Public Sector Perspectives

Gold’s future role in the monetary system Geopolitical events around the world have laid a solid foundation for gold to become prominent once again in the reserve portfolios of central banks, and/or as a way to settle payments for some countries. As geopolitical risks rise, various countries are setting their own restrictive rules for engagement, creating challenges for the financial system and cross-border trading, and raising concerns about holding offshore assets. Increasingly, central banks are holding gold as a hedge against volatility and geopolitical risk. This will continue to enhance gold’s role in the monetary system. De-dollarization One of the factors contributing to the rise in the price of gold and its increasing attractiveness for central banks is reduced investor confidence in the U.S. dollar. The U.S. dollar’s share of foreign reserves held in central banks has been declining; gold has benefited from the trend, thanks to the absence of sanction risk. The value of gold does not depend on the commitment of any single sovereign, enhancing its attractiveness for central banks. However, it is important to consider USD holdings within FX reserves in an historical context. Since USD became a floating rate currency in 1974, it has represented as much as 80% of global reserves (in 1977) and as little as 51% (in 1990). Current holdings of USD as a percentage of total FX reserves, at about 60%, are roughly in the middle of the 50-year range. Chart 3. Proportion of gold in total foreign reserves (Global average in percentage) 0% 2% 4% 6% 8% 10% 12% 14% 16% 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 Source: World Gold Council 5 Returns Gold has proved to be an attractive investment. Returns from gold over the last 20 years have been just slightly lower than S&P 500. Gold also has lower volatility and consequently a higher Sharpe ratio. The rise of gold-backed ETFs caters to this demand, giving investors liquidity and the ability to trade in small sizes, while still having the comfort of physical gold being held on their behalf. 26 The Changing Role of Gold in Central Bank Reserve Management