It has been more than 50 years since the dollar was unpegged from gold. Nevertheless, it remains a key asset for central banks around the world. Gold’s attractiveness has recently increased against a backdrop of rising geopolitical and economic tensions. Will this continue and, if so, what are the implications for the distribution of gold around the world?

Geopolitical events have laid a solid foundation for gold to become prominent once again in the reserve portfolios of central banks, and 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 (Figure 1). This will continue to enhance gold’s role in the monetary system.

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Figure 1. Central banks are increasing gold holdings
(World total in tonnes)

 

Source: World Gold Council

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One of the factors contributing to the rise in the price of gold and its attractiveness for central banks is reduced investor confidence in the dollar. The dollar’s share of foreign reserves held in central banks has been declining and gold has benefitted from the trend, thanks to the absence of sanction risk (Figure 2).

The value of gold does not depend on the commitment of any single sovereign, which makes it attractive for central banks. However, it is important to consider dollar holdings within foreign exchange reserves in an historical context. Since the dollar 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 the dollar as a percentage of total foreign exchange reserves, at about 60%, are roughly in the middle of the 50-year range.

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Figure 2. Current top central bank holders of gold

Ranking	Countries	Tonnes	% of total foreign reserve
1	US	8,133.5	73.2
2	Germany	3,351.5	72.5
3	Italy	2,451.8	69.2
4	France	2,436.9	70.9
5	Russia	2,335.9	30.3
6	China	2,264.3	5.1
7	Switzerland	1,040.0	9.1
8	India	846.2	9.8
9	Japan	846.0	5.4
10	Netherlands	612.5	62.9

Source: World Gold Council
Note: Data as of July 2024

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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 exchange-traded funds 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.

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Figure 3. Central banks are going for gold
Over the next 12-24 months, do you expect to increase, decrease or maintain your allocations to gold? Share of respondents, %

Source: OMFIF Global Public Investor 2025

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Location of gold holdings

With geopolitical risks being one of the drivers for holding gold in foreign reserve portfolios, history shows that the location of gold storage is an important consideration. This was amply demonstrated prior to and during the first and second world wars when significant amounts of gold were shipped to the US and the UK, where much of it still remains. However, this is changing.

Physical security and access to a country’s gold are increasing concerns. The trend began about a decade ago when some central banks decided to move some of their gold holdings back from the US, the UK and France. The issue gained greater focus when the G7 countries froze Russia’s foreign exchange reserves following the invasion of Ukraine in 2022. Concerns intensified when the G7 countries decided to use frozen Russian assets to fund Ukraine’s reconstruction efforts.

Since 2022 countries have increased their repatriation. India announced in 2024 that it repatriated about 100 tonnes of gold back to India from the UK. A study from 2024 shows that 68% of central bank respondents keep their gold onshore, compared to roughly 50% in 2020.

However, a significant portion of global gold reserves continue to be stored at the Bank of England and Federal Reserve Bank of New York. London and New York are international gold trading centres. Storing gold in London and New York allows it to be easily lent out or executed in different forms of gold trades.

Shanghai Futures Exchange and Shanghai Gold Exchange are becoming more prominent in the gold trading market. They have their own challenges when compared to markets in London and New York, including a limited product offering, a relatively small gold lending market and the limited participation of international banks and gold dealers. However, for countries not allied to the West and looking for diversification, these Chinese exchanges offer an attractive alternative.

Gold’s value is intrinsic; it is not tied to any single sovereign entity. As a result, it is increasingly seen by central banks as a hedge against volatility and geopolitical risk. Given that these risks remain elevated, gold is likely to become a more significant part of central banks’ portfolios to preserve value and, if necessary, a means of exchange. The distribution of gold holdings may also become more disbursed, away from the traditional, western financial centres to increasingly reflect the changing geopolitical landscape. In effect, gold has become a growing part of a longer-term strategy for diversifying foreign exchange reserves.

This is an edited version of a paper published by Citi.