The Geopolitical Gold Game

Gold has climbed nearly 80% over the past three years, with most observers crediting central bank accumulation as the primary driver — and they're not wrong. For three consecutive years, global central banks have added over 1,000 metric tons of gold to their reserves. That's a huge jump when you consider annual central bank gold demand averaged just 473 metric tons from 2010 to 2021.

While central bank buying is evident, the more intriguing question is why they’re purchasing gold at such an accelerated pace. From 2009 to 2020, gold’s price generally tracked real interest rates — falling rates fueled rallies in gold and rising rates pressured the metal. But that relationship began to break down post-pandemic, and by 2022 it had completely unraveled. A significant factor in this shift was Russia’s invasion of Ukraine and the resulting Western sanctions, including the freezing of Russian assets. This watershed moment forced many non-Western-aligned countries to reassess the security of holding reserves in currencies and jurisdictions vulnerable to geopolitical retaliation.

Relationship Between Gold and Real Interest Rates Unravels

Source: LPL Research, Bloomberg 06/25/25
Disclosure: Past performance is no guarantee of future results. Real Treasury yields are nominal, or stated, Treasury yields minus annual inflation.

In response, many of the central banks in these countries opted to diversify away from assets denominated in dollars, euros, and other developed market currencies in favor of gold. This diversification trend has been so pronounced that gold has now surpassed the euro as the second-largest reserve asset held by central banks.

Until or unless there’s a fundamental change in the global political landscape — one that convincingly mitigates the perceived risk of sovereign asset freezes — it's difficult to envision a meaningful reversal of the current trend in central bank behavior. However, what may evolve is not the drive to diversify itself, but rather the instruments chosen to achieve it. With gold having experienced such a sustained and substantial price increase in recent years, its appeal as a reserve asset might begin to wane on a relative value basis. This could open the door for central banks to explore additional avenues for diversification, including a renewed interest in other precious metals. Historically, it wasn’t uncommon for central banks to hold a broader mix of metals, and a return to that practice could have far-reaching implications for the commodity markets and global capital flows more broadly, making it a potential development worth monitoring closely over the coming quarters. 

LPL Research maintains a positive view on precious metals, largely due to the array of catalysts that have supported gold’s rally year-to-date. Most global central banks have indicated they are likely to continue adding to gold reserves while reducing dollar denominated reserves in the year ahead. In addition to central bank demand, gold remains supported by a weaker dollar, trade uncertainty, and steady inflows into physical gold-related exchange-traded funds (ETFs). The potential for geopolitical tensions lingering could also act as a tailwind. However, crowded long gold positioning and high relative valuations to the S&P 500 and other commodities suggest there is risk for mean reversion from current levels.