You will be able to explain how sanctions on reserves change central bank behaviour and gold demand.
Marcus has never owned gold. He's always thought of it as something his grandmother kept in a drawer. Then, from 2022 onwards, it kept turning up in the news at record highs, and the usual explanation for its price no longer fitted. The story behind that runs through the US dollar's role in the world, the sanctions placed on Russia, and a quiet change in what central banks choose to hold.
The US dollar is the main currency of international finance. It makes up the largest share of foreign currency reserves that central banks report to the IMF, by a wide margin. The Bank for International Settlements' surveys find it on one side of most foreign exchange trades. Much of world trade, including most oil, is invoiced and settled in dollars, even when neither party is American.
Dollar payments end up passing through US banks, and much of the world's cross-border payment messaging runs on the SWIFT network. That gives the US and its allies a lever no other country has. By cutting a bank off from dollar payments or from SWIFT, they can make it very hard for that bank to do international business at all.
After Russia invaded Ukraine in February 2022, the US, the EU, the UK and other allies froze a large part of the Russian central bank's foreign reserves held in their jurisdictions, and cut several Russian banks off from SWIFT.
Reserves are supposed to be a country's emergency savings, available in a crisis to defend its currency or pay for imports. The freeze showed that reserves held in another country's currency and banks are only as available as that country allows. For central banks in countries that might one day find themselves at odds with the US and its allies, that was a lesson about the risk of holding all their savings in dollars and euros.
Gold held in a central bank's own vaults can't be frozen by anyone else. It has no issuer and doesn't depend on any government's payment system.
World Gold Council data showed central bank purchases of gold rising to unusually high levels in 2022 and staying high in the years after, with central banks in emerging economies, China's and Poland's among them, reported as large buyers. Not every central bank reports its purchases promptly, so the council estimates part of the total.
The World Gold Council publishes quarterly reports on demand for gold, including central bank buying, and individual central banks report their own holdings. Go to those for current figures, since headlines tend to round and select.
That makes gold unlike anything else on Marcus's workbook. A share pays dividends from profits, a bond pays coupons, a REIT pays rent. Gold pays nothing. Its price rests on what other people will pay for it, which depends on three main things.
Demand comes first: jewellery, industry, investors and central banks. Real interest rates are the second. Gold pays no income, so the price of holding it is the real return an inflation-linked bond would have paid you instead. High real yields make that price steep, and gold has tended to struggle then, while low or negative real yields make it cheap to hold. For much of the 2010s, gold and US real yields, from lesson 3.3, Real rates and breakeven inflation from inflation-linked bonds, moved in opposite directions quite reliably. Fear is the third: gold tends to rise in the first days of a shock, as lesson 4.1, How geopolitical shocks reach prices, described.
The unusual part of the period after 2022 was that gold rose strongly while real yields stayed far higher than they had been in the 2010s. Steady central bank buying is one widely cited reason. That's a reminder that relationships between prices aren't laws. They hold until the buyers change.
None of this says whether gold belongs in your portfolio. That's a question for your written allocation, and Crypto and alternative assets, with eyes open covers the ways to hold gold in its own right. What this lesson gives you is a way to read the moves. When gold rises, ask which of the three drivers is doing the work: demand, real rates or fear. When it falls, ask the same.
It also shows that the dollar's role, which makes sanctions powerful, is itself something investors watch. A slow shift in what central banks hold would change demand for US Treasuries and for gold over years. Nothing in the data so far suggests a sudden change, and you don't need to forecast one. You only need to know what to check.
Marcus found the latest World Gold Council report and read the section on central banks. The activity asks you to do the same and write two sentences on what is driving their buying.
Find the latest World Gold Council report on central bank buying and write two sentences on what is driving it.
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