Central banks are doubling down on gold - should you?

When I hear about central banks buying up gold reserves, classic bank heist movies of the nineties and noughties come to mind; naturally one of the most famous being The Italian Job (remake), where an improbably cool and beautiful Hollywood cast steal US$27 million worth of gold and the film's climax involves an iconic pursuit of three Mini Coopers stuffed full of gold bullion as they zip through the streets and tunnels of LA.

That film was released in 2003 - if the team had kept their riches, their stash would now be worth roughly US$250 million.

With the release of the Central Bank Gold Reserves Survey, the buy up from central banks shows no sign of slowing. 

From legacy asset to crisis hedge

The stats show that 95% of the banks who responded expect gold reserves to rise in the next year with 43% of those planning to actively increase their own holdings. None surveyed had any plans to reduce their gold exposure.

Interestingly, the rationale for holding gold has shifted. “Prior to 2023, it was for historical legacy,” Shaokai Fan of the World Gold Council explains. “Now it’s sold because of gold's performance during times of crisis.”

For context, after the Russia-Ukraine war escalated in 2022–2023, Western powers froze and seized Russian foreign reserves. This move spooked central banks globally, raising concerns about the security of holding foreign currency or assets abroad. In contrast, gold can't be frozen.

This change in mindset has aligned with the rise in gold prices. 

“The fact that gold's performance during times of crisis is the most relevant reason for them to hold gold means that they're really viewing gold as a way to build more resilience and safety into their portfolios,” says Fan.

A fragile world is fuelling demand

In the short term, all eyes are on how tariffs evolve and whether the Israel-Iran conflict escalates into a broader war. If central banks see the world heading into a more uncertain medium-to-long-term future, “this actually in fact will drive central banks towards the safety in gold.”

And in the long term, Fan notes that gold could become a more appealing alternative if confidence in traditional safe havens like the US Treasury market begins to waver.

“[It’s the] largest, most liquid safe haven asset in the world and the mainstay of central bank reserves…And if that comes into question, I think that people will turn to gold again as another very common way to look for safety and stability."

Retail investors, gold ETFs and AI tech add to the momentum

Aside from central banks, there are other key dynamics that are impacting the price of gold right now. Chinese retail investors specifically have been quite strong buyers of gold for the last couple of quarters.

“The housing market is in the doldrums, the equity market's not doing very well. So I think a lot of Chinese investors have been turning to gold as a way to diversify away from those things.”

Meanwhile, gold ETFs are amplifying demand, as they must buy physical gold when investors pile in.

Fan shared another interesting factor, which may not have as much of an overall impact on the gold price but is certainly an interesting trend - the rise in AI technology has caused a steadying of the demand for gold for industrial use or for electronic circuitry.

Before that, it had been on a longer term decline, but “because there's this boom for new technology involving much higher computing power, there's a boom as well for circuitry and other components that use gold," Fan explains. 

The potential return of stagflation too, is another tailwind for gold.

“Historically, gold has done very well during periods of stagflation... if the Israel-Iran conflict escalates... I think that will also be concerning and that might spark more safe haven flows into gold as well.”

Is now the time to lock in profits on gold?

All of this points to a continued run for gold. So, what are the downside risks, if any? "We might see central banks around the world start to really hike rates in response to inflation." says Fan. 

“Traditionally, gold has an inverse relationship to higher interest rates, although we've seen that relationship weaken in the past couple of years. So that might be a bit of a drag on the gold price if that happens."

David Tuckwell recently argued that gold's rally might be a good opportunity to take profits. “In our view, this rally presents a timely opportunity to reduce exposure and take profits - even if it means potentially missing another leg up.”

He points to the fact that gold has doubled in Australian dollars over the past 30 months and is already up 25% this year.

Historically, five things support the gold price: geopolitical uncertainty, a weakening US dollar, falling US Treasury yields, retail investor demand and central bank buying. Over the past 18 months, all five have aligned, but in Tuckwells’ view, there are signs this is slowing.

Tuckwell argues that there are signs of profit-taking emerging, especially in US gold ETFs, and the conflict between Israel and Iran could deescalate, which would potentially reduce its tailwind.

As of today, a tentative truce and ceasefire holds…for how long, only time will tell.

Tuckwell notes that “much of the bull case for gold appears priced in. Unless a new, unforeseen crisis emerges, the upside from here in the near term looks limited.”

“No one sells at the top perfectly. But in markets, it’s often better to take a good profit than to chase a perfect one.”

What could derail the rally?

Given gold has been above US$3,000 now for the past couple of months the drag might actually be the higher prices themselves. 

"As we can see so far, this hasn’t really impacted the price - there's still a lot of investment demand, retail investment demand, and central bank demand." says Fan.

However, Fan notes there has been a jewellery demand decrease in terms of the tonnage (i.e., the amount of gold being bought as jewellery). 

While gold jewellery demand is about 35-40% of the market, it does not sway the price of it - that is a financial markets phenomenon. 

It’s an interesting correlation nonetheless, that when you see the gold price is higher, demand for gold jewellery goes down because it's a luxury and discretionary item.

But this too, is only a possible downside and does not impact the gold price overall.

What gold tells us about global fragility

So if we take all of the above insights, and using the broadly accepted benchmark that gold is a safe haven and excellent store of value, will it continue its bull run?

What happens next?

To borrow a line from Evolution Mining’s Jake Klein: 

“I think the gold price is a good barometer of where the world is at. And I think everyone would agree the world is at a fragile point.

Given the likely scenarios we are looking at in the future, gold will get more interest in the next few years, certainly during the Trump presidency.”

A safe haven, indeed. 

Asset Allocation

Is now the time to sell gold?

View

Commodities

Jake Klein: The West is ill-prepared for what lies ahead and the gold price reflects this

View