Deutsche Bank’s Mallika Sachdeva argues that shifting geopolitics are reshaping central bank reserve allocation towards Gold and away from the US Dollar (USD). Sachdeva outlines a framework linking Gold’s reserve share to central bank holdings, Gold prices and global FX reserves, driven mainly by Emerging Markets (EM) central banks. Sachdeva suggests Gold’s share could climb significantly if EMs target higher allocations.

Geopolitics drive central bank gold demand

"The “return of history” has big implications for gold and the dollar. In 1989, Francis Fukuyama argued that humanity had reached “the end of history”. The US became the uncontested hegemon and global trade exploded in a US-defined liberal order."

"The share of gold in central bank reserves is not driven by the global monetary system, but by the global geopolitical environment. Gold’s decline as a share of reserves did not happen with the fall of Bretton Woods in the 1970s, but the fall of the Berlin Wall and the assertion of US hegemony in the 1990s."

"As tectonic geopolitical plates shift again, the share of US dollars in central bank reserves is once more in decline. It has fallen from over 60% to just 40%, while gold’s share has tripled from its lows to 30% today."

"We create a framework for the share of gold in central bank reservesas a function of: (1) the volume of gold held by central banks; (2) the price of gold; and (3) the amount of global FX reserves. We see all three pillars on the move, driven by EM."

"EM central banks have been actively buying gold and driving upward pressure on prices; crucially - their FX reserves may also now begin to structurally decline."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)