Geopolitical risk and the gold–dollar trade-off in international reserves
Kai Arvai, Nuno Coimbra, and Marco Pinchetti, in this paper, analyze how geopolitical and sanctions risk affect investors’ choice between gold and sovereign bonds. The authors combine a general-equilibrium portfolio model with empirical tests. In the model, investors choose between sovereign bonds, more liquid but exposed to sanctions, and gold, which is less liquid and incurs storage or transport costs but is politically neutral. The sovereign issuer strategically chooses debt issuance and whether to impose sanctions. Empirically, the authors use three complementary approaches:
- Daily local projections for the period 1990–2025 to estimate how geopolitical-risk shocks affect gold prices and 10-year US Treasury yields.
- Quarterly country-level local projections for 37 reserve managers over 1985Q1–2024Q4, using IMF reserve data to examine changes in gold shares, gold holdings, and foreign-exchange reserves.
- Heterogeneity tests comparing countries with high and low geopolitical alignment with the United States, measured primarily using UN voting patterns, with military-alliance data used as a robustness check. The authors also use aggregate IMF COFER data to examine shifts in the currency composition of foreign-exchange reserves.
Findings
The model predicts a trade-off between liquidity and custodial sovereignty. In periods of geopolitical stability, investors favor dollar-denominated sovereign bonds because of their liquidity. When sanctions risk rises, gold becomes more attractive because it is less exposed to foreign legal and political control.
The empirical results support this mechanism:
- A geopolitical shock raises gold prices by approximately 0.4% after 60 days and increases the 10-year Treasury yield by about 0.02 percentage points.
- Gold’s share of official reserves rises by roughly 0.4–1.6 percentage points over the following quarters. Gold holdings increase by approximately 1–6% over a two- to three-year horizon.
- The response is substantially stronger in countries less aligned with the United States: their gold share rises by roughly 1–4.5 percentage points after three years, while gold holdings increase by up to around 20% relative to pre-shock levels.
- At the global level, geopolitical risk is associated with a decline in the dollar’s share of allocated foreign-exchange reserves and an increase in non-dollar currencies, particularly the euro.
The authors’ central conclusion is therefore not that gold completely replaces the dollar. Rather, geopolitical fragmentation causes reserve managers to place a higher value on gold’s political neutrality, while dollar assets continue to provide superior liquidity and payment services.
Fool’s Gold? How the USD lost its Shine
Authors: Kai Arvai, Nuno Coimbra, Marco Pinchetti
From: European Central Bank, Banque de France
Gold, net international investment positions, and geopolitical fragmentation
In this paper, Ulrich Bindseil, Svetla Daskalova, and Richard Senner examine the conditions under which countries would replace foreign financial claims with domestically held gold. The authors combine:
- A historical and institutional review of gold as an international settlement asset, the evolution of financial sanctions, and the increasing vulnerability of cross-border financial claims.
- Descriptive evidence on countries’ net international investment positions (NIIPs), official gold holdings, gold production, and gold-storage arrangements.
- A calibrated portfolio model in which NIIP-surplus countries consider importing and holding physical gold to reduce exposure to cross-border seizure or sanctions.
- An extension allowing for gradual adjustment and for additional gold supply from the mobilization of existing private holdings.
The model is calibrated using recent gold-mining cost curves to estimate how large-scale official purchases could affect the gold price.
Findings
The authors’ central argument is that gold can serve as a way for countries with large external financial assets to reduce their exposure to foreign jurisdictions. Unlike dollar- or euro-denominated financial claims, physically imported gold can be held domestically and is not a liability of a foreign issuer. In particular:
- If countries attempted to reduce their NIIP by purchasing newly mined gold, the resulting demand could generate very large price increases. For example, purchasing USD 1 trillion of gold per year could push the gold price above roughly USD 8,500 per ounce. Similarly, a USD 10 trillion annual reallocation scenario could be consistent with a price near USD 67,000 per ounce.
- Gradual adjustment reduces the immediate price impact but prolongs countries’ exposure to cross-border seizure risk.
- Mobilizing existing privately held gold would make supply more elastic and moderate the price response, although it would not eliminate the potential for substantial price increases.
- Domestic gold is not universally safer: it can expose reserves to domestic expropriation or foreign invasion, meaning that the optimal location of gold depends on the credibility of domestic institutions and territorial security.
Gold and the External Wealth of Nations
Authors: Ulrich Bindseil, Svetla Daskalova, Richard Senner
From: ECB, ETH Zurich
