FX.co ★ XAU/USD, GOLD

XAU/USD Mallika Sachdeva of Deutsche Bank contends that changing geopolitics are causing central banks to move their reserve allocation away from the US dollar (USD) and toward gold. Sachdeva presents a paradigm, mostly driven by central banks in emerging markets (EM), that links the reserve share of gold to central bank holdings, gold prices, and global foreign exchange reserves. According to Sachdeva, if EMs aim for larger allocations, Gold's proportion could rise dramatically. The 'return of history' significantly impacts the dollar and gold. Francis Fukuyama claimed that humanity has reached "the end of history" in 1989. Global trade flourished in a liberal order established by the US, and the US emerged as the undisputed hegemon. The worldwide geopolitical context, rather than the global monetary system, determines the proportion of gold in central bank reserves. The fall of the Berlin Wall and the US assertion of hegemony in the 1990s caused gold's share of reserves to shrink, not the collapse of Bretton Woods in the 1970s. The proportion of US dollars in central bank reserves is declining once more as tectonic geopolitical plates shift. While gold's share has risen from its lows to 30% today, it has dropped from over 60% to about 40%. We develop a framework for the proportion of gold in central bank reserves as a function of three factors: (1) the amount of gold owned by central banks; (2) the price of gold; and (3) the total amount of foreign exchange reserves worldwide. All three of the pillars are moving, propelled by EM. Importantly, because EM central banks have been actively purchasing gold and pushing prices higher, their FX reserves may now start to structurally decrease, potentially leading to a shift in global reserve management strategies among these banks.