By Andrew Sheng
South China Morning Post, Hong Kong
Saturday, January 31, 2026
This year started with a bang -- from the United States' intervention in Venezuela and the investigation opened against US Federal Reserve Chairman Jerome Powell to US President Donald Trump's renewed claims on Greenland and the potential for U.S. action following instability in Iran.
Amid these crises, gold prices are now over US$5,500 per ounce, up over 27 per cent from the price on January 1. This comes after the price of gold jumped by 65 per cent in 2025 after soaring by 27 per cent in 2024.
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At such returns, why should one even consider bonds that yield 4 per cent per annum with possible foreign exchange depreciation or fiscal default?
The foreign exchange reserves of all central banks stood at around US$13 trillion in 2025, with official gold holdings at 36,000 tonnes. At the current gold price of US$5,500 per ounce, central banks' gold value would be US$6.37 trillion, which would bring central bank reserves (including gold) to US$19.37 trillion. Thus, gold represents nearly 33 per cent of total reserves which in turn would be 16.5 per cent of the world's gross domestic product (GDP) in 2025.
The Trump administration's policy gyrations and high levels of fiscal debt have caused major investors to reduce their dollar weighting in key portfolios, with the US dollar depreciating at least 6.4 per cent in real effective exchange rate terms in 2025. An example of high dollar exposure with no gold holdings is the largest sovereign wealth fund in the world, Norges Bank Investment Management, with US$2.1 trillion in assets, which held 53 per cent of its portfolio in US equities, bonds and real estate combined at the end of 2025. Norway is next door to Greenland.
With the Fed holding interest rates steady and the Trump administration pushing for lower rates, the outlook for global interest rates and inflation is murky at best. The market has been spooked by Trump's call to increase defence expenditure to US$1.5 trillion by 2027, compared with US$900 billion in 2026.
Trump's One Big Beautiful Bill Act, which front-loaded tax cuts and increased spending, was estimated by the Committee for Responsible Federal Budget to raise federal debt by US$15 trillion, or as much as US$31 trillion if tax cuts are made permanent, increasing the debt-to-GDP to an eye-popping 172-190 per cent of GDP.
With these long-term fiscal concerns, the US dollar is depreciating slowly against other reserve currencies, but massively against gold. Oddly, it seems that almost all central banks would like the price of gold to continue increasing, since it bolsters their total reserve power. They have reportedly been increasing their holdings of gold by more than 1,000 tonnes per year for the last three years. The more gold prices increase, the sooner we will return to a mixed dollar-gold standard, but when will central banks stop their gold accumulation?
Some analysts say that central bank gold holdings will exceed that of their dollar holdings when the price touches US$5,790 per ounce. Gold would then become the world's primary reserve asset. Since the liquidity of gold turnover is as high, if not higher, than sovereign debt bonds, gold for large investors is as good as cash, even though prices may be volatile.
Given geopolitical uncertainties, central banks in advanced economies behave differently from the rest. Central banks in the West (US and European Union) have around 19,000 tonnes of gold or 52 per cent of total official gold holdings. In the US, France, Germany and Italy, gold comprises around 80 per cent of reserves today. The Brics grouping of emerging market economies has over 6,100 tonnes, or at least 16.8 per cent.
China has only 2,300 tonnes, compared with 8,133 tonnes held by the US. For Brics to match the West in gold holdings, its members have to buy aggressively.
With estimated Brics foreign exchange reserves at around US$5 trillion, they have lots of foreign currency to sell to buy gold. But why do they need such large reserves? The answer lies in the real-time gross settlement system in which the full amount of debt from a given transaction needs to be settled immediately at the time of settlement between central banks.
This makes the U.S. dollar the premier foreign exchange reserve settlement currency. After the 1997 Asian financial crisis, emerging markets increased their reserves to protect their exchange rates. However, if a net settlement system is applied using a gold-backed Brics currency unit, the amount of foreign exchange reserves could technically be reduced by up to 70-80 per cent.
What we are witnessing is a moment in which the global community has to decide between believing in the authority of central banks to determine the value of fiat currencies by influencing interest rates or believing in gold as a major store of value. U.S. President Donald Trump's policy gyrations and growing fiscal debt have shown that the U.S. dollar poses risks to investors.
The safer store of value is gold held in domestic vaults that would not be subject to confiscation risks. But where the price will settle will depend on the psychology of governments, investors, and central banks who must hedge their bets against structural risks that have not been encountered since 1971, when the U.S. dollar delinked from gold.
The complex path forward is mission impossible. To paraphrase Oscar Wilde, when the unspeakable chases the uneatable, it is time to think the unthinkable.
Andrew Sheng is a former central banker and financial regulator, currently distinguished fellow at the Asia Global Institute at the University of Hong Kong. He writes widely on Asian perspectives on global issues, with columns in Project Syndicate, Asia News Network, and Caijing/Caixin magazines. His latest book is "Shadow Banking in China," co-authored with Ng Chow Soon, published by Wiley.
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