Central Bank Gold Reserves and Geopolitical Risk Mitigation: Strategic Asset Allocation in a Fragmented Global Economy

In 2025, central banks have accelerated their gold accumulation to an unprecedented pace, with global purchases reaching 710 tonnes in a single year [1]. This surge reflects a strategic shift in reserve management, driven by geopolitical uncertainties, de-dollarization efforts, and the need for portfolio diversification. As the U.S. dollar’s dominance in global reserves wanes—its share dropping to 58% in 2024 [1]—central banks are increasingly viewing gold as a non-sovereign, liquid store of value. This article examines the evolving role of gold in central bank portfolios, the quantitative frameworks guiding its allocation, and the geopolitical dynamics reshaping global monetary systems.

Geopolitical Drivers of Gold Accumulation

Central banks in emerging markets, particularly China, Russia, and Turkey, have led the charge in gold purchases. For instance, the Central Bank of Poland added 67 tonnes of gold in 2025 alone, while China’s reserves grew by 13 tonnes in Q1 2025, bringing its total to 2,292 tonnes [2]. These moves are not merely reactive but part of a broader strategy to insulate economies from sanctions, currency devaluation, and geopolitical shocks. The 2025 Central Bank Gold Reserves Survey by the World Gold Council found that 95% of central banks expect global gold reserves to rise in the next 12 months, with 43% planning to increase their own holdings [2].

The Ukraine conflict and Western sanctions against Russia underscored the vulnerability of foreign currency reserves. As a result, central banks now prioritize assets like gold, which cannot be frozen or manipulated. For example, Uzbekistan’s total reserves increased by 36% in 2024–2025, driven entirely by gold accumulation [5]. This trend is further amplified by U.S. fiscal concerns and the potential for trade wars, which have eroded confidence in dollar-based assets [4].

Strategic Allocation Frameworks

Central banks are integrating gold into their reserve management strategies using quantitative models that balance diversification, liquidity, and risk mitigation. A 2025 HSBC survey revealed that 37.5% of central banks plan to increase gold allocations, viewing it as a geopolitical hedge and a long-term store of value [1]. These models often incorporate variables such as geopolitical risk indices, real interest rates, and inflation expectations. For instance, the Czech National Bank adopted a systematic accumulation strategy in Q1 2025, adding 5 tonnes of gold to its reserves [2].

Emerging markets are particularly aggressive in their gold strategies. China’s “gold for oil” agreements with Russia and India’s 35% year-over-year increase in gold imports in 2024 highlight the role of gold in circumventing dollar-based trade [1]. Meanwhile, the National Bank of Poland’s 49-tonne Q1 2025 purchase underscores its commitment to reducing digital system dependencies [2]. These cases illustrate how gold is being weaponized as a tool for financial sovereignty.

Quantitative Models and Risk Mitigation

Quantitative easing and low real interest rates have historically supported gold’s appeal, but 2025 models now emphasize geopolitical risk. A two-step system GMM approach, for example, shows that gold acts as a counterbalance to financial reserves during sanctions or economic instability [5]. Central banks also use gold/oil ratios to assess market dynamics; at 28.7 in 2025 (below the 40-year average of 33.4), the ratio suggests potential upside for gold if geopolitical tensions persist [4].

Emerging market central banks, however, face unique challenges. While rising gold prices have boosted reserves, over-reliance on gold exports risks “Dutch Disease” effects, as seen in Uzbekistan [5]. To mitigate this, models project liquidity buffers even under a 60% gold price decline, ensuring resilience [5].

Future Outlook and Market Implications

Gold prices reached $3,200 in 2025, driven by central bank demand and geopolitical volatility [4]. Analysts project prices could climb to $4,000 by mid-2026 as institutions like the Shanghai Gold Exchange gain prominence in price discovery [3]. Central banks’ price-insensitive buying has also created a higher floor for gold, even as traditional factors like inflation and currency volatility fluctuate [4].

The role of gold in reserve management is set to expand further. With 85% of central banks citing gold’s crisis performance as a key factor [2], and 78% of emerging market respondents viewing it as a geopolitical diversifier [1], gold’s status as a strategic asset is cemented. However, its allocation remains modest, rarely exceeding 3% of reserves [1], reflecting a balance between diversification and practicality.

Conclusion

Central banks are redefining gold’s role in a fragmented global economy, leveraging it as a hedge against geopolitical risks and a tool for de-dollarization. As the 2025 data demonstrates, gold’s strategic value lies in its physical immunity to digital restrictions and its historical resilience during crises. While challenges like over-reliance on gold exports persist, the integration of quantitative models and geopolitical risk assessments ensures gold remains a cornerstone of reserve diversification. In an era of multipolar monetary systems, gold’s ascent is not merely a trend but a structural shift in how central banks navigate uncertainty.

Source:
[1] Central Bank Gold Reserves Survey 2025, World Gold Council [https://www.gold.org/goldhub/research/central-bank-gold-reserves-survey-2025]
[2] Central Banks - Gold Demand Trends: Q1 2025, World Gold Council [https://www.gold.org/goldhub/research/gold-demand-trends/gold-demand-trends-q1-2025/central-banks]
[3] Gold 2025 Midyear Outlook: A High(er) for Long, SSGA [https://www.ssga.com/us/en/institutional/insights/gold-2025-midyear-outlook-a-higher-for-longer-gold-price-regime]
[4] Geopolitical Factors Driving Gold Price Volatility in 2025, Discovery Alert [https://discoveryalert.com.au/news/gold-price-volatility-2025-analysis-trump-geopolitical/]
[5] The impacts of geopolitical risks on gold, oil and financial reserve management, ResearchGate [https://www.researchgate.net/publication/377930705_The_impacts_of_geopolitical_risks_on_gold_oil_and_financial_reserve_management]