Why in news?

Gold prices have surged past the $5,000 per ounce mark for the first time, even as the US dollar slid to a four-month low. The rally is being driven not just by households, but by aggressive buying from central banks worldwide.

Major central banks have emerged as key buyers of gold, signalling a strategic shift in reserve management. While households traditionally buy gold as a hedge, it is the actions of central banks that underline a deeper structural change in the global financial system.

The underlying driver of this trend is Donald Trump. His trade wars, sanctions-heavy foreign policy, and use of the US dollar as a geopolitical weapon have prompted many countries to reduce reliance on dollar-denominated assets.

As trust in the dollar’s neutrality weakens, gold—being politically neutral and free from sanctions risk—has regained prominence as a reserve asset.

What’s in Today’s Article?

• RBI’s Gold Holdings Drive Forex Reserve Growth
• Debasement of the US Dollar: What’s Driving the Shift
• Weaponising Capital Flows: De-Dollarisation Accelerates
• The Past: How De-Dollarisation Gained Momentum?

RBI’s Gold Holdings Drive Forex Reserve Growth

• India’s central bank, Reserve Bank of India, reported a sharp rise in foreign exchange reserves, with nearly one-third of the increase coming from gains in the value of its gold holdings.
• Although the RBI added only a small quantity of gold, the 70% rise in gold prices over the past year significantly boosted the value of its reserves, far outpacing gains from foreign currency assets.
• Gold’s Rising Share in Reserves
  • What matters more than absolute purchases is gold’s share in total reserves.
  • In India’s case, gold now accounts for 17% of forex reserves, up from 12% a year ago. Similar shifts are visible across several emerging and advanced economies.
• Global Central Banks Buy More Gold
  • The RBI is not alone. Central banks in Poland, Kazakhstan, and Brazil were among the world’s largest gold buyers in 2025, according to data from the World Gold Council.
  • This highlights a coordinated global trend rather than isolated national decisions.

Debasement of the US Dollar: What’s Driving the Shift

• Experts argue that a combination of trade protectionism, sanctions, and the emergence of a multipolar world is gradually pushing global investors away from the US dollar.
• US President Trump has repeatedly asserted the need to preserve the dollar’s global dominance, even threatening BRICS countries with punitive tariffs if they pursue alternatives to the dollar.
• Ironically, his aggressive use of tariffs, sanctions, and economic coercion has accelerated doubts about the dollar’s neutrality and reliability.
• These dynamics have contributed to a sharp weakening of the US dollar—down about 9% in 2025, its steepest fall in nearly a decade.
• As confidence in the greenback erodes, investors and central banks have increasingly turned to gold as a safe-haven asset.
• Why It Matters?
  • De-dollarisation threatens to dilute US financial power, reducing Washington’s ability to shape global trade and financial systems.
  • At the same time, policy uncertainty and geopolitical sabre-rattling have boosted demand for gold, reinforcing its role as a hedge against currency debasement and geopolitical risk.

Weaponising Capital Flows: De-Dollarisation Accelerates

• De-dollarisation is most visible in commodities, with a growing share of global energy trade now priced in non-dollar contracts, weakening the dollar’s traditional dominance.
• The trend is extending to government bond holdings.
  • The Reserve Bank of India has steadily reduced its US Treasury exposure, with holdings falling to $186.5 billion in November 2025 from $234 billion a year earlier.
  • China’s US government bond holdings have also dropped to a 16-year low.
• Institutional Investors Start Exiting US Treasuries
  • Concerns are no longer limited to states.
  • Denmark’s major pension funds announced plans to exit US Treasuries, citing geopolitical uncertainty, including comments by Donald Trump, and Danish pension funds have taken similar positions.
  • Earlier this month, Deutsche Bank warned that US threats against Europe could prompt the continent to cut holdings of US debt, effectively weaponising capital flows.
  • The European Union holds about $10.4 trillion in US portfolio assets, accounting for nearly 29% of foreign ownership.
  • Trump has warned of “big retaliation” if Europe sells US bonds, underscoring how financial flows are becoming tools of geopolitical leverage.

The Past: How De-Dollarisation Gained Momentum

• The move away from the US dollar gathered pace after United States Government froze Russia’s foreign exchange reserves following its invasion of Ukraine in February 2022.
• This action heightened concerns among countries about the safety of holding dollar-denominated assets.
• De-dollarisation has been gradual but persistent. Data from the IMF show that the US dollar’s share in global foreign exchange reserves fell to a 30-year low of 58.5% in 2024, down from 71% in 1999, reflecting steady diversification by central banks.
• The Future: Dominance for Now, Uncertainty Ahead
  • Despite these shifts, the US dollar remains overwhelmingly dominant, accounting for 89% of global over-the-counter foreign exchange turnover.
  • However, if current US policies and rhetoric continue, especially under the Trump administration, the pace of diversification away from the dollar could accelerate, leading to more visible structural change in the global monetary system.