Gold crossing the $5,000-per-ounce mark as the US dollar slips to multi-month lows is more than a market curiosity. It reflects deeper changes underway in the global monetary order, where central banks — not retail investors — are emerging as the most important drivers of gold demand. At the heart of this shift lies growing unease about the future of the US dollar in a more fragmented and politically charged world economy.
Why Gold Is Rallying Despite Falling Dollar Yields
Gold’s historic rally comes at a time when the US dollar has weakened sharply, falling around 9% in 2025 — its steepest annual decline in nearly a decade. Traditionally, a strong dollar suppresses gold prices. The reverse is now playing out as policy uncertainty, geopolitical risks, and fears of currency debasement push investors towards safe-haven assets.
What makes this rally distinctive is who is buying. Alongside households and fund managers, central banks have emerged as consistent and aggressive buyers, signalling that gold is being treated not just as a hedge, but as a strategic reserve asset.
RBI’s Gold Gains and the Changing Composition of Forex Reserves
India’s experience illustrates this shift clearly. Data from the show that foreign exchange reserves rose by over $14 billion in a single week in January 2026 — the sharpest increase in 10 months. Nearly one-third of this rise came from the valuation gains on its gold holdings, which stand at around 880 tonnes.
Over the past year, the value of the RBI’s foreign currency assets rose only modestly, even as total reserves expanded much faster. The key driver was gold: the value of India’s gold reserves jumped nearly 70%, despite the RBI adding only about four tonnes in physical terms during 2025. As a result, gold now accounts for about 17% of India’s forex reserves, up from 12% a year earlier.
Central Banks Lead the Gold Accumulation
The RBI is not alone. According to data from the , the largest gold buyers in 2025 included Poland, Kazakhstan and Brazil. What matters more than the absolute purchases, however, is the rising share of gold in reserve portfolios across countries.
This trend reflects a conscious diversification strategy rather than short-term speculation. Central banks are reducing their reliance on assets denominated in a single currency — particularly the US dollar.
Trump, De-Dollarisation and Policy Uncertainty
A key catalyst behind this shift is the return of Donald Trump to the US presidency. Trump’s aggressive stance on trade, sanctions, and tariffs — including threats of punitive duties on countries if they challenge the dollar’s dominance — has heightened fears about the weaponisation of the global financial system.
Ironically, even as Trump publicly defends the dollar’s supremacy, his policies have undermined confidence in it. Economists have pointed out that unpredictable sanctions, trade wars, and unilateral actions accelerate the desire of countries to insulate themselves from dollar-based vulnerabilities.
Weaponisation of Capital Flows and US Debt
Signs of this are increasingly visible in sovereign debt markets. India has steadily reduced its holdings of US government bonds, while China’s holdings have fallen to their lowest level in 16 years. Beyond central banks, institutional investors are also reacting. European pension funds have begun questioning the safety and political neutrality of US Treasuries, especially amid rising geopolitical tensions.
Analysts warn that if threats of retaliatory tariffs and financial pressure persist, foreign holders — particularly in Europe — may further reduce exposure to US assets. The European Union alone accounts for nearly a third of foreign ownership of US portfolio assets.
The Ukraine Shock and a Longer-Term Trend
The freezing of Russia’s foreign exchange reserves after its invasion of Ukraine in 2022 marked a turning point. It demonstrated that reserve assets could be rendered unusable by geopolitical decisions, prompting many countries to reassess what constitutes a “safe” reserve.
Data from the International Monetary Fund show that the US dollar’s share in global forex reserves has fallen to about 58.5% — the lowest in over 30 years — down from over 70% at the turn of the century. Gold and non-dollar currencies have gradually filled the gap.
Limits to De-Dollarisation
Despite these shifts, the dollar’s dominance is far from over. Nearly 90% of global foreign exchange transactions still involve the US dollar, reflecting its unmatched liquidity, depth, and network effects. There is no immediate alternative that can fully replace it.
However, what is underway is not a sudden collapse but a slow erosion — a move from dominance to dependence reduction. If US policy continues to rely heavily on economic coercion and unpredictability, this gradual trend could accelerate.
What to Note for Prelims
- Gold crossed $5,000 per ounce amid a weakening US dollar
- Central banks are major drivers of gold demand
- Gold now forms about 17% of India’s forex reserves
- US dollar share in global reserves has fallen to a 30-year low
What to Note for Mains
- Concept of de-dollarisation and its limits
- Impact of sanctions and geopolitics on global financial stability
- Changing composition of forex reserves and role of gold
- Implications of reserve diversification for global power structures
