Central bank officials attending meetings in Italy this week stressed that gold is playing an increasingly important strategic role in reserve diversification, as geopolitical uncertainty and sanctions risk boost the appeal of the safe-haven asset.

"Gold is a physical asset that can be stored in your own vault, so it is perceived as somewhat less affected by sanctions or allies becoming adversaries," said Gioia Cellai, deputy general manager for market and monetary policy operations at the Bank of Italy, speaking Tuesday on a panel alongside other central bank officials at the London Bullion Market Association's annual conference in Sorrento.

The gathering provided a rare platform for officials responsible for managing some of the world's largest gold reserves to explain their reasons for holding the metal.

Officials from Germany, Poland, Italy, and Mexico said a major attraction of gold is its ability to diversify risk during periods of market and geopolitical stress.

Gold's multi-year rally pushed prices to a peak just below $5,600 an ounce earlier this year, driven mainly by investment demand and central bank buying.

In recent months, prices have pulled back as markets expect further interest rate increases; rising rates typically weigh on non-yielding gold.

A survey published in June by the World Gold Council and YouGov Plc showed a record number of central banks saying they expect to increase their gold reserves.

"We have always had considerable room to raise our allocation," said Tomasz Malkowski, chief foreign exchange and gold trader at the National Bank of Poland, on the same panel. "The goal is not to replace currencies such as the euro or the dollar, but to build a more diversified reserve structure."

In recent years, central bank purchases have been a key driver of gold price gains. After the Russia-Ukraine conflict in 2022, when the United States and its allies froze Russia's foreign exchange reserves, the pace of central bank gold buying doubled.

More recently, concerns about excessive government spending in major Western economies and declining confidence in their currencies have also supported gold prices, in what investors call the "debasement trade."

"We are in a world where there is no complete trust in any issuer," said the Bank of Italy's Cellai. "Second, this is also a bit of the Russia lesson."

Ximena Alfarache, international operations manager at the Bank of Mexico, said gold's strategic importance could rise further as its role in digital asset markets grows.

"This could change its nature to some extent, making it more strategic, because it would be easier to operate and easier to build overlay strategies," she said.

Bundesbank President Joachim Nagel said Monday at the same event that rising government debt levels strengthen the case for central banks to increase their gold holdings.