A silent revolution. Banks are running into gold. The era of the dollar is coming to an end

Since the 2008/09 financial crisis, the price of gold has increased fivefold. Initially, it was a reaction to the immediate crisis, and then also to the long-term phase of zero interest rates. Recently, however, another important factor has emerged: central banks.

“The share of gold in central bank reserves has doubled over the past four years to about 30 percent.” – write Mallika Sachdeva and Michael Hsueh in the latest Deutsche Bank study.

At the same time, the share of the dollar dropped significantly. At the beginning of the century it reached 60 percent. and remained at this level for approximately two decades. However, there has been a downward trend for about eight years. Currently, this share is just over 40%. “It is important that the decline in the share of the dollar in central bank reserves did not occur in favor of other fiat currencies, but in favor of gold,” say Deutsche Bank experts. Central banks are relocating, moving away from the dollar in favor of gold.

“Central banks are an important driver of demand for gold,” adds Imaru Casanova, portfolio manager for gold and precious metals at the investment firm VanEck. This cannot be overshadowed by the fact that some countries have been selling gold again recently. For example, Turkey did this to support its currency. Also, the Persian Gulf countries, which have been among the largest gold buyers in recent years, will probably be more restrained in the near future – due to the crisis in the Middle East, they are unable to build additional reserves.

“But once conditions stabilize, central bank demand will likely return to normal,” Casanova says. Additionally, other countries have recently shown increased demand for gold, such as Indonesia, Guatemala and Malaysia. — The overall trend towards diversification of reserves, especially away from the US dollar, remains intact, he adds.

The effects of Trump's policy

But why is gold gaining importance again – and now? For a long time this explanation was taken for granted: in a system of paper currencies, which could theoretically be expanded indefinitely, gold plays the role of a natural anchor of value. However, this view may be too narrow. “Contrary to popular opinion, we believe that the share of gold in central bank reserves is not determined by the global monetary system, but by the global geopolitical environment,” write Deutsche Bank economists. A look at history confirms this thesis.

The price of gold did increase after the collapse of the Bretton Woods gold-based monetary system, which operated from the end of World War II to 1973. However, in the 1980s, this trend reversed again and the price of gold remained stagnant for approximately two decades. This was the time when the United States became the sole superpower.

The situation is similar in the case of central bank reserves. “The decline in the share of gold in reserves did not occur with the collapse of the Bretton Woods system in the 1970s, but with the fall of the Berlin Wall and the establishment of US hegemony in the 1990s.” – say Sachdeva and Hsueh. This phase ends now at the latest – and with it the hegemony of the dollar. “The tectonic plates of geopolitics are shifting again, the share of the US dollar in central bank reserves is decreasing again,” they add.

The superpower status that the United States enjoys is no longer unchallenged. An important factor driving this process is growing geopolitical fragmentation. Trade conflicts, sanctions and new power blocs are changing the international environment. Recently, this tendency has significantly intensified as a result of the unpredictable policy of the American administration led by Donald Trump.

As a result, concerns about the stability of the political and financial order in the world have increased, says Thu Lan Nguyen, an analyst at Commerzbank. — With Trump's continued attacks on the Federal Reserve, some fear about its independence. This, combined with aggressive US customs policy, may undermine the status of the US dollar as a safe investment, he adds.

Turn to gold

However, even before Trump came to power, a growing tendency to form blocs could be observed around the world, with the West on one side and China and Russia on the other – bringing together everyone who is critical of the United States. — This megatrend not only encourages private and institutional investors to strategically increase the share of gold in their portfolios, but above all motivates central banks to increase gold reserves as an anchor in an increasingly uncertain currency system, says Thomas Kulp, an analyst at DZ Bank.

In recent years, however, gold has been purchased primarily by central banks from emerging countries, in particular from a very specific group of them. According to an analysis by Deutsche Bank, emerging countries, which over 30 percent they obtain their military equipment from China or Russia, currently hold about one third of their reserves in gold – in the case of all other countries it is just over 15%. Gold is becoming the anti-US bloc's increasingly preferred reserve currency.

If this trend continues, it may at some point lead to a breakthrough in the global financial system. “Since the collapse of the Bretton Woods system, gold no longer plays a formal role in the international monetary architecture,” write Deutsche Bank experts. However, history has always been characterized by changes between the phases of fiat money and money backed by physical assets. “It would be consistent — not inconsistent with history — to expect gold to make a comeback at some point.”

What exactly could this look like? This remains an open question. It is possible that new currencies backed by gold will be created, for example on the initiative of the BRICS countries. Or digital constructs like gold-pegged stablecoins. However, one thing is certain – the change has already begun.

If this trend continues, it will continue to drive the gold price. Even if the share in global reserves increases only from the current 30 to 40 percent, the price of this precious metal could increase to 14,000. hole. (PLN 50.4 thousand) per troy ounce – calculated by Deutsche Bank experts. However, they consider the level of $8,000 to be more likely. (PLN 28.8 thousand) over the next five years. And this means that they are even cautious in their forecasts. UBS expects gold prices to reach $6,200 this year. (PLN 22.3 thousand), and JP Morgan – USD 6,300. (PLN 22.7 thousand).

Ultimately, it all comes down to one fundamental question: will the global order, and with it the role of the dollar, stabilize or will its fragmentation continue? In the first case, gold will probably lose its importance. In the second, it may again become the central anchor of the international financial system, which will have corresponding consequences for its price. Which is more likely – everyone can judge for themselves.