Gold, sanctions, and the slow erosion of the dollar reserve standard

The 2022 reset: weaponized reserves and the new safety calculus #

On 26 February 2022 the United States, European Union, United Kingdom, Canada, and Japan immobilized Bank of Russia foreign exchange reserves held in their jurisdictions. The Russian central bank reported total international reserves of $643.2 billion immediately before the invasion of Ukraine, and subsequent G7 estimates converged on roughly $300 billion of frozen assets, principally euro, dollar, and sterling securities held with custodians and correspondent banks in the sanctioning jurisdictions. The remaining usable reserves were the gold stock held inside Russia, a smaller stock of yuan at the People's Bank of China, and unallocated SDRs.

Reserve managers in Beijing, New Delhi, Riyadh, Ankara, Warsaw, Pretoria, and Brasilia drew the same lesson. Holding national savings inside the financial infrastructure of geopolitical counterparties is no longer costless. The Bank for International Settlements quarterly review for the first quarter of 2023 documented a structural step up in gold buying that began in the second quarter of 2022, and the World Gold Council Quarterly Gold Demand Trends reports official sector net purchases of 1,082 tonnes in 2022, 1,037 tonnes in 2023, and 1,045 tonnes in 2024. These are the three highest annual totals on record. The pre 2022 decade averaged 477 tonnes annually.

Who is buying, who is sitting still #

Accumulation since 2022 is concentrated in jurisdictions with non alignment, sanctions exposure, or strategic currency ambition. The People's Bank of China resumed reported purchases in November 2022 after a six year hiatus, accumulating to 2,279 tonnes by April 2024 according to its monthly reserves disclosures, paused public reporting from May to November 2024, and resumed in December 2024. The Central Bank of the Republic of Turkey added 148 tonnes in 2023 and 75 tonnes through the first three quarters of 2024, and the National Bank of Poland under governor Adam Glapinski declared a programmatic objective to take gold to 20 percent of reserves, lifting holdings from 229 tonnes at end 2021 to 448 tonnes by end 2024.

The Reserve Bank of India increased holdings from 760 tonnes at end 2021 to 876 tonnes by end 2024, per the RBI half yearly reports on foreign exchange reserves. RBI also relocated more than 100 tonnes from Bank of England custody to domestic vaults during 2023 and 2024, the largest physical repatriation since the 1991 balance of payments crisis. The Monetary Authority of Singapore added 76 tonnes in 2023, Kazakhstan and Uzbekistan continued domestic mine purchase programs, and the Czech National Bank began a multi year accumulation. Conversely, the United States Treasury, the Bundesbank, the Banca d'Italia, the Banque de France, and the Swiss National Bank have been essentially static, and Western central banks have stopped selling.

COFER, the dollar share, and the slow drift #

The IMF Currency Composition of Official Foreign Exchange Reserves dataset tracks the currency mix of allocated reserves. As of the fourth quarter of 2024 the dollar share stood at 57.8 percent, against 58.4 percent a year earlier and 71.0 percent in the first quarter of 1999. The euro share is 19.8 percent, the Japanese yen 5.4 percent, the British pound 4.8 percent, the Canadian dollar 2.7 percent, the Australian dollar 2.2 percent, the Chinese renminbi 2.18 percent, and the Swiss franc 0.18 percent.

Two features merit attention. First, the dollar share has fallen by roughly 13 percentage points over a quarter century, around 0.5 percentage points per year, and the recent step down is comparable rather than dramatic. Second, the principal beneficiary is not the renminbi but a basket of non traditional reserve currencies including the Australian dollar, Canadian dollar, Korean won, and Singapore dollar, alongside gold which COFER does not capture. The renminbi share peaked at 2.83 percent in the first quarter of 2022, declined through 2023 and 2024, and now sits below the level it held before the freezing of Russian assets, driven by yuan depreciation, China's balance of payments dynamics, and limited offshore yuan liquidity. The substitution showing up in flow data is from dollar to gold and to a diversified basket, not to a single rival reserve currency.

Price action: real rates, geopolitical premium, and the official bid #

The LBMA gold afternoon auction reference price closed 2021 at $1,805.85 per troy ounce. By the end of 2022, after a 425 basis point Federal Reserve hiking cycle that historically would have crushed gold, the close was $1,824.32, broadly flat. The 2023 close was $2,062.40. The $2,000 threshold became a floor over 2024, and the LBMA afternoon price first cleared $2,400 in May, $2,500 in August, and $2,700 in October, with a 2024 close at $2,609.60 and intra year highs above $2,790. COMEX futures and Shanghai Gold Exchange Au9999 contracts tracked the move, with periodic Shanghai premiums above 50 dollars per ounce reflecting Chinese physical demand and capital control friction.

The standard model anchored on real rates has broken down for this cycle. From early 2022 the ten year US TIPS yield rose from negative 1.0 percent to a peak above 2.5 percent in October 2023, a move that on the historical regression should have implied a gold price near $1,500. That gold instead traded above $2,000 for almost all of 2023 and above $2,400 for most of the second half of 2024 reflects a structural addition to the price equation. Sell side desks at JP Morgan, Goldman Sachs, and HSBC have converged on a decomposition in which central bank flow contributes 200 to 350 dollars, the geopolitical premium another 100 to 200 dollars, and the residual is real rate and dollar dynamics. The official sector bid is price insensitive in a way that ETF, jewelry, and speculative flows are not.

Plumbing: London, Zurich, New York, and the Shanghai pull #

The official gold market runs through the LBMA loco London settlement system, the Zurich refiners, and the New York COMEX futures complex. Daily LBMA cleared volume averaged 25.4 million ounces in 2024 per LBMA clearing statistics, and Bank of England vault holdings remained near 5,420 tonnes. COMEX 400 ounce and kilobar inventories were rebuilt during 2023 and 2024 after the 2020 pandemic dislocation. The Shanghai Gold Exchange has emerged as the third pole, with daily Au9999 kilobar volumes routinely above 30 tonnes and onshore premiums to loco London ranging from 5 to more than 50 dollars per ounce when Chinese demand outpaces tightly managed import quotas.

Physical bullion flow now responds to a tri polar pricing axis. When Shanghai trades at a sustained premium, kilobars produced in Switzerland and Singapore are pulled east, drawing on London vault stocks. The reverse holds when Western investment demand revives. Reserve managers outside the G7 perimeter increasingly request domestic vaulting, and the RBI repatriation of more than 100 tonnes from Bank of England custody is the most visible expression. The People's Bank of China has not published the location of its gold, but the State Administration of Foreign Exchange has emphasized domestic vaulting.

BRICS settlement, jewelry collapse, and the implications for clients #

Local currency settlement outside the dollar payments perimeter has become normalized. Russia and China conducted more than 90 percent of bilateral trade in rubles and yuan during 2024 per Russian government statements and customs data, India and the United Arab Emirates settle a meaningful share of crude oil trade in dirhams and rupees under the framework signed in July 2023, and the ASEAN regional payment connectivity agreement has expanded bilateral local currency corridors. None of this displaces the dollar in third party commodity invoicing or offshore syndicated lending. What it does is reduce the marginal need for emerging market central banks to hold dollar working balances in proportion to gross trade, freeing reserve allocation for diversification.

On the demand side, Chinese jewelry consumption fell 24.7 percent year on year in 2024 per the World Gold Council, the steepest decline on record outside a recession, as record nominal prices priced households out. Indian jewelry demand was more resilient after the July 2024 budget cut import duty from 15 to 6 percent, but global jewelry tonnage dropped to a multi year low. The market thus depends on the official bid as never before. The implication for clients is fourfold. First, the dollar share of allocated reserves is likely to drift another 5 to 8 percentage points lower over the next decade at 0.5 to 1.0 percentage point per year, diversification rather than collapse. Second, the relative beneficiary is gold and a non traditional reserve basket, not the renminbi as a single substitute. Third, gold equities remain mispriced, with the GDX index up 41.6 percent in 2024 versus 27.5 percent in spot, but with senior producer all in sustaining costs near 1,450 dollars per ounce against a spot above 2,700, free cash flow yields are compelling. Fourth, emerging market local currency sovereign duration is structurally underpriced as reserve managers rotate from dollar to gold and to local issuance, arguing for selective duration extension in Brazil, Mexico, India, and Indonesia bond curves over 2026 to 2028.

Sources #

• World Gold Council Quarterly Gold Demand Trends
• World Gold Council central bank statistics
• IMF Currency Composition of Official Foreign Exchange Reserves (COFER)
• IMF International Financial Statistics
• Bank for International Settlements Quarterly Review
• US Treasury International Capital (TIC) data
• People's Bank of China official reserve assets
• Bank of Russia international reserves
• Reserve Bank of India report on management of foreign exchange reserves
• National Bank of Poland gold reserves
• Central Bank of the Republic of Turkey weekly press bulletin
• Monetary Authority of Singapore official foreign reserves
• LBMA reference prices and clearing statistics
• Shanghai Gold Exchange Au9999 market data
• CME Group COMEX gold futures
• Bank of England gold vault holdings