What we are witnessing is a return to a gold/dollar hybrid standard. The international community must choose between two beliefs: trusting central banks to determine the value of fiat currency by influencing interest rates, or trusting gold's historical role as the primary store of value.
The new year began dramatically—with US military intervention in Venezuela, a public investigation into Fed Chair Powell, a sovereignty claim over Greenland accompanied by threats of tariffs against dissenting EU members, escalating domestic issues in Iran, and potential intervention by the US or Israel. These factors have driven gold prices above $5,500 per ounce, a 27.3% increase from the price on January 1, 2026 ($4,339.65 per ounce). Following a 27% gain in 2024, gold surged 65% in 2025.
Given such high returns, why would anyone consider bonds with annualized yields of only 4%, which may also carry currency depreciation or sovereign default risks?
According to the latest World Gold Council data, central banks' foreign exchange reserves total approximately $13 trillion, with official gold holdings at 36,000 tonnes. At the current price of $5,500 per ounce, the value of central bank gold holdings is about $6.37 trillion. This brings total central bank reserves (including gold) to $19.37 trillion, representing 32.9% of their total foreign exchange reserves and equivalent to 16.5% of the 2025 global GDP ($117.2 trillion).
Policy volatility from the Trump administration, high valuations in US equities, and elevated US government debt levels have prompted major investors to reduce the dollar's weighting in their core portfolios. Since January 1, 2025, the US dollar's real effective exchange rate has depreciated by 6.4%. A prominent example of high dollar exposure without gold allocation is the world's largest sovereign wealth fund, Norway's central bank investment management arm, which manages $2.1 trillion in assets. By the end of 2025, US stocks, bonds, and real estate comprised 53.2% of its portfolio. Norway is adjacent to Greenland.
While the Federal Reserve aims to keep interest rates stable, the Trump administration is pushing for lower rates, leaving global interest rate and inflation trends uncertain. Markets are alarmed by Trump's call to increase defense spending to $1.5 trillion by 2027 (up from $900 billion in 2026). If tax cuts are made permanent, the Committee for a Responsible Federal Budget estimates that Trump's proposed "Big and Beautiful Act," by front-loading tax cuts and increasing spending, could add $15 to $31 trillion to federal debt, pushing the debt-to-GDP ratio to a staggering 172% to 190%.
Given these long-term fiscal concerns, the dollar is depreciating slowly against other reserve currencies but sharply against gold. Curiously, nearly all central banks hope for continued gold price appreciation, as it enhances their total reserve capacity. Over the past three years, they have added over 1,000 tonnes of gold annually. The higher gold prices rise, the sooner we return to a dollar-gold hybrid standard. But when will central banks stop accumulating gold?
According to Deutsche Bank research, when gold reaches $5,790 per ounce, central banks' gold holdings will exceed their dollar reserves, making gold the global "primary" reserve asset. Since gold currently trades with greater liquidity than most sovereign debt, it functions as effectively as cash for large investors, despite potential price volatility.
Given geopolitical uncertainty, central banks in developed nations behave differently from the rest. As issuers of reserve currencies, Western (US + EU) central banks hold 18,899 tonnes of gold, accounting for 51.7% of the total, with gold comprising 65% to 75% of their foreign exchange reserves. The BRICS bloc holds only 6,133 tonnes, or 16.8%, while other nations hold 11,460 tonnes, or 31.4%. Officially, China holds just 2,305 tonnes, representing only 9% of its $3.5 trillion in total reserves, compared to the US Treasury's 8,133 tonnes. Therefore, for BRICS to match Western gold holdings, they must actively buy.
Estimates suggest BRICS foreign exchange reserves total around $5 trillion, meaning they have substantial foreign currency available to sell for gold purchases. But why do they need such large reserves? The answer lies in the current Real-Time Gross Settlement system, which requires all obligations in dollar-foreign currency transactions settled via central bank ledgers to be settled in real-time and in full. This makes the US dollar the primary settlement currency for foreign exchange reserves. After the 1997 Asian financial crisis, BRICS nations increased reserves to protect their exchange rates. However, if net settlement using a gold-backed BRICS currency unit were adopted, the scale of foreign exchange reserves could technically be reduced by up to 70% to 80%.
What we are witnessing is a return to a gold/dollar hybrid standard. In this system, the international community must choose between two beliefs: trusting central banks to determine the value of fiat currency by influencing interest rates, or trusting gold's historical role as the primary store of value. Policy volatility from President Trump and growing government debt mean the dollar carries risks that are difficult for investors to quantify. A safer store of value is historic gold held in domestic vaults, free from confiscation risk. But where prices ultimately stabilize will depend on the psychology of governments, investors, and central banks—who must hedge against structural risks not seen since the US dollar was decoupled from gold in 1971.
The path forward is complex, presenting a formidable challenge. To paraphrase Oscar Wilde: When the unspeakable pursues the inedible, it is time to contemplate the previously unthinkable.