You will be able to explain how sanctions on reserves change what central banks do and how much gold they buy.
Gold's record prices from 2022 onwards make sense once you put three things together: how far the US dollar reaches in world finance, what happened to Russia's reserves in 2022, and why central banks have been buying gold since. The gold price itself comes down to three main drivers: demand, real interest rates and fear.
Marcus has never owned gold and always thought of it as something their grandmother kept in a drawer. From 2022 onwards they kept seeing it in the news at record highs, and they noticed that the usual explanation for its price no longer fitted.
The US dollar is the main currency of international finance. It makes up the largest share, by a wide margin, of the foreign currency reserves that central banks report to the IMF. Bank for International Settlements surveys find the dollar on one side of most foreign exchange trades. Much of world trade, including most oil, is invoiced and settled in dollars, even when neither the buyer nor the seller is American.
Dollar payments end up passing through US banks. Much of the world's cross-border payment messaging also runs on SWIFT, the network that carries those messages between banks. Together these give the US and its allies a lever no other country has: if a bank is cut off from dollar payments or from SWIFT, it can find it very hard to do any international business at all.
Russia invaded Ukraine in February 2022. The US, the EU, the UK and other allies then froze a large part of the Russian central bank's foreign reserves held in their jurisdictions, and several Russian banks were cut off from SWIFT.
Reserves are a country's emergency savings, meant to be used 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. Central banks in countries that might one day be at odds with the US and its allies drew a lesson from this: holding all their savings in dollars and euros carries risk.
Gold held in a central bank's own vaults cannot be frozen by anyone else. It has no issuer and does not depend on any government's payment system. World Gold Council data showed central bank gold purchases rising to unusually high levels in 2022 and staying high in the years after. Central banks in emerging economies were reported as large buyers, including China's and Poland's. Not every central bank reports its purchases promptly, so the World Gold Council estimates part of the total.
Marcus keeps a workbook of their holdings, and gold is unlike anything else on it. Shares pay dividends from profits, bonds pay coupons and REITs pay rent, while gold pays nothing. Because it has no cash flow, its price rests on what other people will pay for it. Three main drivers decide that:
Demand, from jewellery, industry, investors and central banks. Real interest rates. Because gold pays no income, the cost of holding it is the real return an inflation-linked bond would have paid instead. When real yields are high, holding gold is costly and gold has tended to struggle. When real yields are low or negative, gold is cheap to hold. Lesson 3.3, "Real rates and breakeven inflation from inflation-linked bonds", explains where US real yields come from. Fear. Gold tends to rise in the first days of a shock, as described in Lesson 4.1, "How geopolitical shocks reach prices".
For much of the 2010s, gold and US real yields moved in opposite directions quite reliably. Relationships between prices are not laws, though, and they hold only until the buyers change. After 2022 gold rose strongly while real yields stayed far higher than they had been in the 2010s, which is why the usual explanation stopped fitting for Marcus, and steady central bank buying is one widely cited reason for the change.
When you see gold rise or fall, first note which way it moved, then ask which of the three drivers is doing the work: demand, real rates or fear.
Whether gold belongs in your own portfolio is a question for your written allocation. The ways to hold gold in its own right are covered in "Crypto and alternative assets, with eyes open".
The dollar's role, the same role that 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 do not need to forecast one, only to know where to check the figures.
The World Gold Council publishes quarterly reports on gold demand, including central bank buying, and individual central banks report their own holdings. Use these primary sources for current figures in preference to headlines, which tend to round numbers and select the ones that suit the story.
Marcus found the latest World Gold Council report and read the section on central banks. Do the same, then 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 behind it.
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