“There’s a lot of risk out there and yet asset prices are at all-time highs,” she said, BBC reported. “We expect there will be an adjustment at some point.”

“The thing that really keeps me awake at night is the likelihood of a number of risks crystallising at the same time — a major macroeconomic shock, confidence in private credit goes, AI and other risky valuations readjust — what happens in that environment and are we prepared for it?” Breeden said during the interview.

Since the US and Israel began joint strikes on Iran late February, global equity markets have been volatile, but still trading near record highs, with New York’s S&P 500 and Nasdaq Composite closing at new all-time highs recently and global stocks clawing back from Iran war losses. The MSCI World ex-US index, which tracks large and mid-cap stocks listed across more than 20 developed markets, is up more than 5% so far in 2012, and has also rebounded from the Iran war losses.

Breeden also pointed to problems in private credit , where mounting defaults have drawn criticism and concern from market watchers.

“Private credit has gone from nothing to two-and-a-half trillion dollars in the last 15 to 20 years. It hasn’t been tested at this scale with the degree of complexity and interconnections it has with the rest of the financial system so far,” Breeden said. “It’s a private credit crunch, rather than a banking-driven credit crunch, that we’re worried about.”

The post Bank of England warns of risks to equity markets appeared first on International Finance.

“In recent months, central banks from Guatemala, Indonesia and Malaysia have all bought gold, either following a long hiatus or for the first time ever,” said Shaokai Fan, global head of world banks for the World ‌Gold Council.

“A phenomenon we’ve been seeing in the last few months is new central banks, or ⁠central banks that have been inactive or absent from the gold market for a long time, entering the gold market. I think that might be a trend that will continue into 2026,” the official commented.

“Some central banks are also buying gold from ‌small-scale domestic producers to ⁠support the local ⁠industry and to stop those gold sales going to bad actors,” Fan noted without elaborating on the details.

In March 2026, gold prices had plunged by more than USD 1,000 per troy ‌ounce to last trade around USD 4,340, and talking about this, Fan told Reuters, “Historical trends suggest ⁠it’s partly due to margin call-related selling.”

“The record peak for gold was just shy of USD 5,600 in late January. During a gold selloff in October, central banks stocked up on the metal, but it’s too early to see if the same phenomenon has occurred with this month’s rout. Central bank demand for gold may decline because higher prices not only deter new buying but also ‌increase the weight of existing gold holdings relative to total reserves,” Fan said.

The World ‌Gold Council, as per its January estimates, expects record gold prices to slow purchases by central banks to 850 metric tons in 2026 from 863 tons in 2025, even though their buying remains elevated when compared to the pre-2022 level. The same buying process ⁠accounted for some 17% of total demand in 2025.

The post Will central banks’ demand for gold decline? appeared first on International Finance.

In 2026, the real question is not whether the dollar dominates; it obviously does. The real question is whether governments are preparing for a future where they rely on it, just a bit less. A shift, yes. A revolution? Not really.

According to Bidisha Bhattacharya, economist and columnist at ThePrint, what we are seeing is not some financial revolution. It is much slower than that. Almost cautious.

“De-dollarisation is real, but it is evolutionary rather than revolutionary. The US dollar continues to account for roughly 60% of global foreign exchange reserves, down from over 70% in the early 2000s. That decline reflects diversification at the margins, not displacement at the core,” Bhattacharya told International Finance.

The fundamentals still favour the dollar – deep financial markets, extremely liquid US Treasury bonds, strong institutional trust, and powerful network effects. The more people use the dollar, the harder it becomes to replace.

“Currency hierarchies do not flip suddenly. They evolve, slowly,” she said.

The world is not abandoning the dollar; it is just becoming less dependent on it.

The gold rush — again

If there is one clear signal of this caution, it is gold. Central banks have been buying massive amounts of gold, levels not seen in decades. Annual purchases have exceeded 1,000 tonnes in recent years. This is not about returning to the gold standard or romanticising the past. It is about protection.

“Gold accumulation has become strategically significant. This is less about replacing the dollar, and more about hedging geopolitical and sanctions risk. Gold carries no counterparty risk and functions as a balance-sheet stabiliser in a fragmented global order,” Bhattacharya said.

However, markets play a role too. Mike McGlone of Bloomberg Intelligence argues that central bank demand has been pushing prices higher.

“Central banks purchased about 1,000 tonnes annually in 2022, 2023 and 2024, roughly double the previous decade’s average,” McGlone told International Finance, pointing to geopolitical tensions, including Russia’s invasion of Ukraine, as a key driver.

Yet, McGlone suggests, markets may be overheating. Gold could approach major peaks around 2026, similar to historic highs seen in 1980 and 2011. Some reserve diversification, he says, may reflect in rising gold prices rather than a fundamental move away from the dollar.

He added that most of the statistics on gold outpacing dollar reserves are due to the rapid rise in gold prices.

“Demand is notably driven by geopolitics rather than inflation concerns,” he said, suggesting easing global tensions could weaken momentum. So yes, gold is rising. But it is not replacing the dollar.

Sanctions, control, and financial vulnerability

Politics also plays a big role. Maybe more than markets.

Elnara Omarova, who works on BRICS-related policy issues, says many governments are mainly concerned about control, or the lack of it.

“The key issue is access. When central bank reserves can be frozen, or access to dollar clearing becomes politically contingent, governments start reassessing how much exposure they are comfortable carrying. Diversification then becomes less about ideology and more about insurance,” Omarova told International Finance.

This has taken several forms: larger gold reserves, more holdings in non-dollar currencies, and bilateral trade settled in local currencies. And, it has been especially seen in energy markets. But these changes remain limited. The dollar still wins on liquidity, convertibility, and market depth.

“Diversification is happening, but it is incremental,” Omarova said, describing it as risk management in a more fragmented geopolitical environment rather than an abrupt shift away from the dollar. Omarova calls it a recalibration, not a rupture.

The BRICS Debate: More noise than disruption

Much of the public discussion focuses on BRICS, and whether the group could reshape global finance. Analysts urge caution.

The influence of BRICS comes mostly from coordination, encouraging trade in national currencies, experimenting with alternative financing mechanisms, and building regional frameworks. It signals exploration, not replacement.

Lawrence Ngorand of Busara Advisors sees BRICS as pushing the world toward a more multi-polar financial system.

“The BRICS play a catalytic role, accelerating the transition toward a more multi-polar financial architecture,” Ngorand told International Finance.

Their role lies in building alternative infrastructure and gradually shifting expectations. But structural problems remain. There is no widely trusted BRICS reserve currency. Institutional cohesion varies. Therefore, the shift is evolutionary. It is slow, uneven, and incomplete.

Global trade moves beyond the dollar

This may be the toughest question. Commodity markets still revolve around dollar pricing, largely because the liquidity, benchmarks, and risk-management systems behind them are already deeply built around it.

Omarova suggests bilateral trade settlement could diversify, especially among politically aligned countries. But changing global pricing norms would require deep financial markets, credible alternatives, and global participation. That is a very high barrier.

Ngorand agrees that the dollar’s dominance is not just about politics; it is structural power: capital markets, institutional trust, and global network effects.

Regional diversification is happening, particularly in energy trade and infrastructure financing. But full displacement? Unlikely.

“The most likely outcome is not the replacement of the dollar, but the emergence of a more fragmented system where multiple currencies co-exist,” Ngorand said.

When gold stops being a safe haven

Yet the gold story is also becoming more complicated. For years, gold has been treated almost instinctively as the ultimate reserve hedge. No counterparty risk, no dependence on another country’s financial system, and no sanctions exposure. In a fragmented geopolitical world, that logic sounds almost irresistible. But, not everyone is convinced the current gold surge reflects long-term stability.

According to Mike McGlone, gold’s behaviour in markets has started looking less like a traditional store of value and more like a volatile financial asset.

“Gold has shifted toward a speculative asset from a store of value,” McGlone told International Finance, noting that its 180-day volatility has surged to about 2.4 times that of the S&P 500, the highest relative level in two decades. That is not what investors typically expect from a stability anchor.

In fact, McGlone suggests that in many financial stress scenarios, gold might not behave the way policymakers hope. Instead of rising as a stabiliser, it could actually fall when measured in dollar terms.

“In most scenarios, gold declines in USD terms,” he said.

That observation complicates the narrative that central banks are simply replacing dollar reserves with bullion. In reality, gold still trades in a dollar-dominated financial ecosystem. Its pricing, liquidity, and global trading infrastructure remain deeply tied to the very system some countries are trying to hedge against.

So, the question becomes less about whether gold can hedge geopolitical risk and more about whether it can truly function as a substitute for dollar liquidity during a crisis. So far, the answer remains uncertain.

The signalling game of ‘central bank gold’

There is another dimension to the gold story: signalling. Central banks do not build reserves only for their own balance sheets. Sometimes, what they hold also sends a signal outward to markets, to investors, to anyone watching closely.

For emerging economies in particular, the mix of reserves can quietly influence how strong or stable a country looks from the outside.

Some analysts say the recent gold buying could partly be about that, projecting resilience in a world where capital can move very quickly.

Still, McGlone is not entirely convinced that signalling explains everything.

When asked whether emerging economies might be building gold reserves partly to reassure international investors, his answer was simple: it is not entirely clear.

“I don’t know,” he said.

However, what he does emphasise is the geopolitical context that triggered the surge in demand.

Russia’s invasion of Ukraine and the subsequent freezing of foreign reserves forced policymakers everywhere to rethink financial vulnerability. The episode highlighted how even large sovereign reserves could suddenly become inaccessible under sanctions. That shock pushed many countries toward alternative assets, including gold.

But geopolitical dynamics are constantly evolving. And in McGlone’s view, the political drivers behind the gold rally may already be fading.

“The geopolitical bid is diminishing,” he said, pointing to shifting political developments in countries often aligned against US influence, including changes in Syria and evolving political pressures in Venezuela, Iran, and Cuba.

If the geopolitical momentum behind gold weakens, the rally could slow as well. Which raises an uncomfortable possibility for central banks: they may have increased their gold exposure precisely when the market was reaching peak enthusiasm.

When reserve diversification goes too far

Gold accumulation has been dramatic. In some ways, it is historically dramatic. But there is also a point where diversification strategies begin to face diminishing returns. For McGlone, that point may already have been reached.

He argues that gold prices have stretched far beyond their historical norms, reaching the largest premium relative to their 60-month moving average ever recorded, and also hitting unprecedented levels relative to the broader Bloomberg Commodity Spot Index.

In other words, markets may have already priced in much of the geopolitical risk. Gold has seen this kind of moment before.

The last time prices became this detached from historical norms was around 1980. That peak held for nearly three decades before being surpassed again during the 2000s commodity boom.

History, McGlone suggests, does not rule out a similar pattern repeating itself. Gold may simply have gone up too much.

“It faces the curse of going up too much,” he said, suggesting the market could be approaching a long-term peak like earlier historical cycles.

If that happens, central banks could find themselves holding larger gold positions at precisely the moment when prices begin stabilising or retreating. This would not invalidate diversification strategies, but it might reduce their immediate financial benefits.

What could push gold even further?

History shows that major geopolitical events can dramatically reshape reserve strategies. Russia’s invasion of Ukraine already triggered one such shift.

That event accelerated discussions about sanctions exposure, financial sovereignty, and alternative reserve assets. But what could push gold even further into the centre of global reserve strategy?

McGlone believes the catalyst would have to be similarly dramatic.

Russia’s invasion created the current surge. Replicating that shock would require a comparable geopolitical rupture. And, for now, he believes the gold momentum may already be reaching its limit.

“The risk is that the bid for gold has reached its apex,” he said.

Inside BRICS: Between unity and rivalry

If gold represents one hedge against the dollar system, BRICS represents another kind of experiment altogether. But even within the BRICS grouping, the financial dynamics are more complicated than they appear from the outside.

According to Lawrence Ngorand, China plays an unmistakably central role in shaping many of the bloc’s financial initiatives.

“China is the central gravitational force within BRICS financial initiatives,” Ngorand told International Finance. That influence stems from simple economics.

China is the largest economy in the group, the biggest trading partner for most other members, and the only one with a fully developed cross-border payments infrastructure capable of supporting large-scale alternative settlement systems.

As a result, efforts to expand local-currency trade often gravitate naturally toward the Chinese renminbi. But that influence comes with political limits.

India, Brazil, and several other BRICS members remain cautious about allowing any single currency to dominate the bloc’s financial architecture. Concerns about dependency and geopolitical balance remain strong, which is why many BRICS initiatives are carefully framed as multi-polar rather than renminbi-centric.

China brings the scale and liquidity, but the set-up of the system still tries to make sure each member keeps the sense that its own financial sovereignty remains intact.

Is a unified ‘BRICS currency’ difficult?

Even setting politics aside, BRICS financial integration runs into a simpler reality. The member economies are very different from each other.

China maintains a tightly managed capital account. India operates with partial controls. Brazil and South Africa run fairly open financial systems compared with some of the others. Russia’s financial system has been reshaped by sanctions and partial isolation. These differences complicate coordination.

Exchange-rate regimes vary. Inflation dynamics differ. Fiscal policy frameworks are not aligned. Even trade structures diverge significantly.

China’s economy is manufacturing-driven. Several other BRICS members depend heavily on commodities. Others rely more on services. These asymmetries make deeper monetary integration extremely difficult.

According to Ngorand, meaningful integration would require convergence across multiple dimensions: inflation targeting frameworks, exchange-rate policy co-ordination, reserve pooling mechanisms, and credible lender-of-last-resort structures. None of those currently exist.

“The bloc lacks the institutional cohesion that underpinned the euro project,” Ngorand said.

Commodity and currency power

Still, one area where BRICS expansion could make a difference is commodities. The inclusion of major commodity exporters within the group has strengthened the theoretical foundation for alternative trade settlement systems.

Countries like Saudi Arabia, Brazil, and Russia sit at the centre of global energy and resource flows. And commodities anchor a significant portion of global trade. If even a small share of these transactions began shifting toward non-dollar settlement, new liquidity corridors could gradually emerge. That possibility matters.

“If even a modest share of oil or critical mineral trade shifts to local currencies, it creates liquidity pools and hedging demand outside the dollar system,” Ngorand said.

However, commodity power alone does not automatically translate into monetary dominance. Even if some commodities start trading in other currencies, the money does not always stay there. In many cases, it quietly circles back to dollar assets anyway.

Take oil revenues. No matter what currency the trade begins with, a large share often ends up parked in United States Treasuries. So, commodities might open alternative payment routes, but that alone does not really dismantle the dollar system. For that, a deeper financial infrastructure would be required.

The shock that could change everything

Ultimately, the speed of any monetary transition depends on shocks. Gradual diversification can go on for years, even decades, without shaking the foundations of global finance. Systems like this rarely change overnight. But, history shows that faster shifts usually come after disruption.

Ngorand suggests that a real acceleration in de-dollarisation would likely require confidence to crack across several pillars of the current financial system at the same time. That could include large-scale sanctions affecting multiple mid-sized economies, a major disruption to global payment networks, such as SWIFT, or a severe dollar liquidity crisis.

Another possibility would be sustained fiscal instability in the United States that undermines confidence in Treasury markets, the backbone of global reserve management. In the absence of such shocks, inertia favours continuity.

“Reserve currency transitions historically occur over decades, not years,” Ngorand said. Which means the dollar system may evolve, diversify, and fragment at the edges without collapsing at the centre, at least for now.

Not the end, just an adjustment

What emerges from all this is not a collapse. It is an adjustment. Central banks are hedging. Governments are managing risk. The world feels more uncertain, thanks to geopolitical, economic, financial, and reserve strategies that reflect that anxiety. The system is becoming more hedged, more political, and slightly more multipolar.

Bhattacharya summed it up thus: “We are not witnessing the end of dollar dominance, but rather the end of unquestioned dollar comfort.”

The dollar remains at the centre. Just no longer alone in commanding unquestioned trust.

The post Sanctions or war, the dollar always wins appeared first on International Finance.

The report provides an exhaustive analysis of the drivers behind this “sovereign pivot.” It argues that the return to gold is a rational response to a converging trifecta of systemic pressures. Fiscal Dominance in the United States, where unmanageable debt loads have constrained monetary policy and eroded the dollar’s store-of-value proposition. Geopolitical Fragmentation, exemplified by the weaponisation of the financial system and acute crises such as the 2026 Greenland diplomatic standoff. And Technological Bifurcation, where new payment rails like Project mBridge are enabling a post-dollar trade architecture that increasingly utilises gold as a neutral settlement asset.

Drawing on data from 2025, the analysis details the specific strategies employed by key institutional actors, ranging from the “stealth accumulation” of the People’s Bank of China and the logistical feats of the Reserve Bank of India’s repatriation programme, to the defensive posturing of European central banks, such as the National Bank of Poland. The evidence suggests that we are witnessing the end of the “return on capital” era for reserve managers and the beginning of the “return of capital” era, where the primary objective is immunity from seizure, sanctions, and debasement.

The age of fiscal dominance

To understand why central banks are shifting to gold with such urgency, one must first dissect the deterioration of the fiscal landscape in the United States. The traditional inverse correlation between gold and real interest rates has broken down, replaced by a correlation with US fiscal instability. We have entered the age of “fiscal dominance,” a regime where the central bank’s primary function shifts from inflation targeting to sovereign solvency assurance.

By late 2025, the United States’ gross national debt surpassed $38 trillion, a milestone that carries grave implications for the global reserve system. For the first time since the demobilisation following World War II, debt held by the public has reached approximately 100% of Gross Domestic Product (GDP).

However, unlike the 1940s, this accumulation is not the result of a temporary existential conflict but the product of structural deficits that show no sign of abating.

The most critical metric driving central bank anxiety is the cost of servicing this debt. In fiscal year 2025, net interest payments on the federal debt exploded to $970 billion, nearly tripling the $345 billion paid just five years prior in 2020. By early 2026, the annualised run rate for interest payments breached $1.1 trillion, surpassing the entire US national defence budget.

The inversion where a superpower spends more on past consumption than on future security signals a potential “Minsky Moment” for US Treasury securities. Nearly one-fourth of these interest payments flow to foreign investors, including strategic rivals like China, effectively transferring wealth abroad to service domestic profligacy. Central bank reserve managers, tasked with preserving national wealth, are increasingly viewing US Treasuries not as risk-free assets, but as certificates of confiscation via inflation.

The concept of fiscal dominance posits that when government debt reaches unsustainable levels, the central bank loses the agency to set interest rates based on economic cooling needs. If the Federal Reserve were to raise rates to combat persistent inflation, which remained sticky throughout 2025, it would cause interest service costs to spiral further, potentially triggering a sovereign default or necessitating draconian austerity.

Consequently, the market has concluded that the Fed is “trapped.” It must keep interest rates artificially low relative to inflation to alleviate the government’s debt burden, a process known as financial repression. This realisation drives the “debasement trade.” Investors and central banks understand that the only political path of least resistance for the US government is to inflate away the real value of the debt. In this environment, gold serves as the only asset with no counterparty liability and an infinite duration, immune to the printing press.

Compounding the fiscal arithmetic is the overt politicisation of the Federal Reserve. The period from 2025 to 2026 has seen an unprecedented attack on the independence of the US central bank. President Donald Trump, in his second term, has repeatedly criticised Federal Reserve Chairman Jerome Powell, going so far as to suggest his termination for failing to lower rates rapidly enough to support administration policies.

Rumours of Powell’s forced resignation circulated intensely throughout 2025, creating volatility in global markets. While legal scholars debate the President’s authority to fire the Fed Chair “for cause,” the mere existence of the threat undermines the dollar’s credibility. For foreign central banks, the Fed’s independence was the guarantor of the dollar’s value. If the Fed is perceived as “captured” by the executive branch, forced to monetise debt or fund tariffs, the risk premium on holding dollars rises exponentially.

The political friction has led to a decoupling of gold prices from traditional drivers. Historically, high nominal interest rates like the 4.25%-4.5% range seen in 2025 would dampen gold demand. However, in 2025 and 2026, gold surged alongside yields, indicating that the market is pricing in institutional risk rather than opportunity cost. As Gold Policy Advisor Ugo Yatsliach notes, central banks are preparing for a world where “dollar assets can be sanctioned, seized or devalued” by political fiat.

For decades, the standard central bank reserve portfolio mirrored the 60/40 investment strategy. Almost 60% in risk assets (equities) and 40% in defensive assets (sovereign bonds). US Treasuries were the bedrock of the defensive allocation. However, the correlation between equities and bonds turned positive in the high-inflation environment of the mid-2020s, meaning both asset classes fell together.

With US Treasuries suffering consecutive years of real losses, and facing the prospect of further issuance to fund the deficit, reserve managers are actively seeking a replacement for the “40%” defensive slice of their portfolios. Gold has emerged as the superior alternative. It offers the safety profile of a bond (no default risk) with the upside of an equity (inflation protection), without the political baggage of the US Treasury market.

Geopolitical fragmentation

While fiscal dominance provided the combustible material for the gold rally, geopolitical fragmentation acted as the spark. The era of the “Great Moderation” and global integration has given way to a chaotic multipolarity, where economic warfare has become a standard tool of statecraft.

In January 2026, a bizarre yet dangerous diplomatic crisis exemplified the volatility of the new order. President Trump renewed his administration’s interest in acquiring Greenland from Denmark, citing critical national security interests and the island’s vast mineral wealth. Unlike his previous attempts, this initiative was accompanied by coercive economic threats.

When European leaders, including the Danish Prime Minister, rejected the proposal, the US administration escalated tensions by threatening a 10% tariff on eight NATO allies, including the UK, Germany, France, and the Netherlands, unless they facilitated the transfer. The crisis intensified when rumours of a US military “reconnaissance mission” Operation Arctic Endurance surfaced, raising the spectre of an armed standoff between NATO members.

The market reaction was immediate and violent. The “Greenland Tax” was priced into every ounce of gold, pushing spot prices past $5,100. Investors and central banks fled US assets, fearing that if the US could threaten its closest military allies with economic devastation over a territorial dispute, no jurisdiction was safe. Although President Trump eventually de-escalated the military rhetoric at the Davos World Economic Forum, the damage to trust was permanent. The incident proved that the “political risk” usually associated with Emerging Markets had arrived in the G7.

The Greenland Crisis was merely the latest chapter in a narrative that began with the G7’s freezing of Russia’s foreign exchange reserves in 2022. This event remains the primary psychological driver for emerging market central banks. It demonstrated that FX reserves are not “money” in the bank, but credit claims extended to foreign powers, claims that can be cancelled at will.

The realisation birthed two distinct groups of gold buyers. The Axis of Evasion, countries like China, Russia, and Iran that are actively preparing for or currently under sanctions, for whom gold is an operational necessity to bypass the US dollar system, and The Strategic Hedgers, countries like Saudi Arabia, Brazil, and India that are technically US partners but wish to maintain strategic autonomy, diversifying not to attack the dollar, but to insulate themselves from becoming collateral damage in US foreign policy disputes.

The US administration’s willingness to use the dollar as a cudgel, imposing tariffs on allies and sanctions on rivals, has accelerated “de-dollarisation” from a theoretical concept to a practical urgency. Central banks are responding by reducing their holdings of US Treasuries and recycling trade surpluses into gold.

China, for instance, has reduced its US Treasury holdings from $1.3 trillion in 2011 to roughly $765 billion by 2025, utilising the proceeds to fund its massive gold accumulation programme. Similarly, Saudi Arabia and other petrostates are increasingly settling trade in non-dollar currencies and storing the surplus in neutral assets. Gold serves as the only asset that is “politically neutral” as it carries no visa, requires no SWIFT code, and recognises no sanctions.

The great accumulation

The theoretical shift in reserve management doctrine has translated into massive physical flows. Central banks have transitioned from being net sellers of gold, a trend that persisted until 2010, to becoming the dominant “whales” of the market. In 2025, central bank purchases accounted for nearly 25% of annual global gold demand, a historic high.

Central bankers, despite their technocratic veneer, are susceptible to herd behaviour. Hugh Morris of Z/Yen Group identifies a powerful “groupthink” dynamic driving the current rush. As early movers like Poland and China publicised their gold buying, it created a “fear of missing out” (FOMO) among peers. Reserve managers faced a new reputational risk. If a crisis occurred and they held only depreciating dollars while their neighbours held appreciating gold, they would be viewed as incompetent.

This herd behaviour is creating a self-reinforcing price loop. As central banks buy, the price rises, as the price rises, the value of gold reserves increases, validating the strategy and encouraging further buying to maintain target allocation percentages.

China is the gravitational centre of the gold market. The PBoC officially reported gold purchases for 14 consecutive months through the end of 2025, adding approximately 27 tonnes per month. By December 2025, official reserves stood at 2,306 tonnes.

However, market analysts widely believe these figures understate the reality. Goldman Sachs and other forensic accountants estimate that China’s true accumulation is likely significantly higher, potentially exceeding 5,000 tonnes. The “stealth accumulation” is executed through state-owned banks and sovereign wealth funds such as the CIC to avoid spiking the market price too rapidly and to mask the full extent of China’s preparation for a post-dollar order.

The accumulation is linked to the internationalisation of the Renminbi (RMB). By backing the RMB with a “gold wall,” China aims to increase the currency’s attractiveness as a trade settlement unit. The fact that gold now constitutes 8.5% of China’s official reserves up from 3% a decade ago signals a determined strategic shift.

India’s strategy in 2025 was defined by repatriation. In a logistical operation shrouded in secrecy, the RBI moved over 100 tonnes of gold from the Bank of England’s vaults in London back to domestic storage in India. By September 2025, the RBI held over 65% of its 880-tonne reserve domestically, up from just 38% in 2022.

The decision was clearly motivated by the lessons learnt from the sanctions imposed on Russia. The assets held abroad are assets at risk. The RBI’s governor and analysts cited the need to “insulate” India’s wealth from geopolitical freezing risks. Furthermore, despite high prices, the RBI continued to accumulate gold, aiming to raise the metal’s share of forex reserves to 20%. This demand was price-inelastic. The strategic imperative of sovereignty outweighed the tactical consideration of buying at all-time highs.

The most aggressive buyers relative to GDP have been the Eastern European nations on the frontline of the NATO-Russia tension. The National Bank of Poland (NBP) aggressively bought gold throughout 2025, surpassing the holdings of the European Central Bank (ECB) and reaching over 550 tonnes. NBP Governor Adam Glapiński has explicitly linked this buying to national security, stating that gold ensures Poland’s creditworthiness even if it were cut off from the global financial system during a war.

Similarly, the Czech National Bank (CNB) has engaged in 33 consecutive months of buying, targeting 100 tonnes by 2028. These nations are buying for existential hedging. They are preparing for a scenario where the Euro or Dollar payment systems might fail them in a moment of supreme crisis.

The Central Bank of Turkey remains a relentless buyer, adding to reserves for 28 consecutive months, using gold as a tool to manage the Lira’s volatility and as ultimate collateral for the banking system. The Monetary Authority of Singapore has accumulated significant gold to balance its massive equity portfolio, highlighting in 2025 gold’s role as a stabiliser in a “high-risk” global environment. Switzerland’s Swiss National Bank, while not actively buying new tonnage in the same volume, reaped a windfall of CHF 36 billion in 2025 solely from the revaluation of its massive 1,040-tonne holding, a success story that has served as a potent advertisement for gold’s utility to other central banks.

Architecture of post-dollar trade

The gold rush is not taking place in a technological vacuum. It is intimately linked to the development of new cross-border payment systems designed to bypass the US dollar and SWIFT. In these architectures, gold is evolving from a passive asset sitting in a vault to an active settlement token.

Project mBridge is arguably the most significant development in global finance that the general public ignores. Originally a collaboration between the BIS and the central banks of China, Hong Kong, Thailand, and the UAE, it allows for direct peer-to-peer exchange of Central Bank Digital Currencies (CBDCs).

In late 2024, the BIS withdrew from the project, leaving it under the operational control of China and its partners. It’s a move that signalled the platform’s transition from “pilot” to “geopolitical tool”. By late 2025, mBridge had processed over $55 billion in transaction volume, a staggering 2,500-fold increase since its inception.

The platform allows, for example, a Thai company to pay a UAE supplier in Digital Yuan (e-CNY), which the UAE firm can immediately convert to Digital Dirham or hold. Crucially, the system supports “payment versus payment” (PvP) settlement without using a US correspondent bank. This eliminates the risk of US sanctions blocking the trade.

Where does gold fit in? In a multi-CBDC arrangement, trade imbalances inevitably arise. If the UAE accumulates too much e-CNY, it may want to swap it for a neutral asset. mBridge’s architecture is being designed to integrate tokenised gold as a bridge asset. Gold becomes the “reference unit” that clears the ledger, effectively remonetising the metal for the digital age.

The expanded BRICS bloc has explicitly called for a non-dollar payment system, dubbed “BRICS Pay”. While skeptics dismiss the idea of a single “BRICS currency” due to the economic disparities between members, the bloc is coalescing around a “Unit of Account” model backed by a basket of commodities, primarily gold (40%) and oil.

Russia and China have already operationalised the digital rouble and digital yuan for bilateral energy trade. BRICS Pay aims to link these domestic payment systems. The threat of 100% tariffs from the US administration on countries abandoning the dollar has only accelerated this development. Member nations realise that to survive such economic warfare, they need a settlement medium that the US cannot touch. Physical gold, stored domestically and tokenised on a permissioned ledger, provides exactly that capability.

The private sector is also anticipating this shift. Tether, the issuer of the world’s largest stablecoin (USDT), accumulated approximately 27 tonnes of gold in Q4 2025, valued at $12.9 billion. The move aligns with Hong Kong’s strategic initiative to establish a 2,000-tonne gold storage facility to support digital asset backing.

The convergence of stablecoins and gold reserves hints at a future where private digital currencies are backed not by US Treasury bills (as is currently the case) but by gold. This would further drain liquidity from the US bond market and channel it into the bullion market, creating a “digital gold standard” running parallel to the fiat system.

The new gold standard

The synchronised pivot to gold by the world’s central banks is a structural realignment of the global monetary order. It represents a vote of “no confidence” in the current fiat-based financial architecture, specifically the dominance of the US dollar.

The events of 2025 and 2026 have redefined what constitutes a “safe asset.” For fifty years, “safety” was synonymous with US Treasuries, liquid, interest-bearing, and backed by the hegemon. Today, “safety” is defined by sovereignty. An asset is only safe if it cannot be frozen, sanctioned, or debased by a foreign power. Gold is the only asset that meets this criterion. US Treasuries, subject to fiscal dominance and geopolitical weaponisation, do not.

As the US debt spiral continues, $1.1 trillion in interest and growing, and geopolitical fragmentation deepens (Greenland, Ukraine, Taiwan), the demand for gold will likely intensify. The emergence of digital rails like mBridge will operationalise this gold, moving it from the vault to the settlement ledger.

We are witnessing the birth of a de facto Gold Standard. Central banks are building a “gold wall” to protect their economies from the storms of the 21st century. In this new era, gold is the ultimate currency of freedom.

The post Building the global gold wall appeared first on International Finance.

There’s a palpable mix of excitement and trepidation on the horizon, as investors pile into an asset they view as a haven amidst today’s turmoil. But with gold fever sweeping the markets, many are asking the following: What’s driving this boom, and could it all come crashing down?

A “perfect storm” of economic anxiety, geopolitical conflict, and shifts in monetary policy has burnished the yellow metal’s appeal. Fears of recession and inflation have grown, exacerbated by unpredictable policy moves, such as abrupt changes in US trade strategy, which rattled markets and weakened confidence in paper assets. Wars (whether trade or actual military conflicts) have further spooked investors and fuelled demand for the timeless safety of gold. In this climate of uncertainty, gold’s lustre as a store of value shines brightly once again.

Yet history teaches that what goes up can also come down. Previous gold booms, notably those in 1980 and 2011, were followed by painful corrections. So, is today’s rush for gold a prudent hedge or the makings of a bubble?

International Finance will examine the drivers of the current gold price boom, explore why gold is traditionally seen as a haven, consider the risks of investing amid the hype, weigh expert opinions on a potential bubble burst, and discuss strategies for navigating uncertainty in these volatile times.

Drivers behind gold’s record boom

Gold’s recent rally has been stunning in its speed and scale, and several key forces are behind it. Economic jitters and monetary policy shifts have played a leading role. Over the past year, investors have grown nervous about the global economy’s health.

In the United States, the world’s largest economy, flashing signs of a late-stage cycle include slowing growth, a softening labour market, and rising fears of an impending recession. Inflation, which spiked after the pandemic, remains a concern as well.

Gold thrives in such conditions because it is viewed as a hedge against inflation and currency weakness. Unlike cash, gold’s value cannot be eroded by central banks printing more money or by a surge in consumer prices.

Indeed, analysts point out that the cost of gold “tends to spike in times of high inflation and economic and geopolitical uncertainty.” As inflation fears rise, so does demand for the yellow metal, which is used to preserve purchasing power.

At the same time, monetary policy itself has boosted gold. After aggressively raising interest rates to combat inflation in 2022 and 2023, major central banks adopted a more dovish stance in 2024 and 2025. For example, the United States Federal Reserve halted its rate hikes and even began hinting at (or enacting) rate cuts as economic momentum faltered. Lower interest rates make non-yielding assets like gold more attractive than bonds or savings accounts, reducing the “opportunity cost” of holding gold.

It is no surprise, then, that gold’s price jumped in March 2025 immediately after the Fed signalled a pause, surging above $3,050/oz following a decision to hold rates steady. Expectations of global rate cuts have been a major tailwind.

“We reiterate our long gold recommendation due to the gradual boost from lower global interest rates, structurally higher central bank demand, and gold’s hedging benefits against geopolitical, financial, and recessionary risks,” Goldman Sachs noted.

With the prospect of easier money on the horizon, investors are preemptively moving into gold as a safeguard against any policy-driven currency debasement.

Geopolitical turmoil and uncertainty form the second key pillar of gold’s boom. In recent years, the world has witnessed a series of destabilising events, and gold often shines when confidence in governments or international stability wavers. One major factor has been the escalation of trade conflicts.

Under President Donald Trump, the United States unleashed waves of tariffs and trade threats, sparking a trade war that unsettled global supply chains and alliances. By early 2025, an aggressive new round of American tariffs on many of its main trading partners had investors on edge.

The recent surge in gold prices has closely mirrored the spike in global policy uncertainty, driven in part by fears of substantial tariffs and their potential inflationary consequences, as one analysis observed. Markets interpreted Trump’s erratic trade moves and even direct attacks on Federal Reserve independence as destabilising forces.

For instance, when President Trump lambasted Fed Chair Jerome Powell as a “major loser” on social media and demanded immediate rate cuts, it undermined confidence and sent shockwaves through financial markets. Stocks tumbled, the dollar’s value slipped, and gold promptly hit a fresh record high in the aftermath. This episode vividly demonstrated how political and policy drama can boost gold. When investors fear that policymakers might mismanage the economy or upend the status quo, many seek refuge in a tangible asset whose value is not at the mercy of any government’s decisions.

Beyond trade disputes, traditional geopolitical risks have also driven a flight to safety. Ongoing wars and international tensions, such as the conflict in Ukraine and flare-ups in the Middle East, have unnerved investors and spurred demand for gold, which is often viewed as crisis insurance.

Historical data show that gold’s price tends to rise during episodes of heightened geopolitical risk or military conflict, periods when stocks and even government bonds might fall. In such extreme moments of uncertainty (for example, the days after the 9/11 attacks or the outset of the COVID-19 pandemic), gold has proven its mettle by preserving value and rising in tandem with other havens like the American dollar. Today’s climate, marked by diplomatic rifts and security concerns, is a textbook case of investors hedging against worst-case scenarios.

Crucially, central banks around the world have themselves become major drivers of the gold rush, a relatively new dynamic that cannot be overlooked. Over the past few years, central banks, especially in emerging markets, have been voracious purchasers of gold, bolstering their reserves.

They have collectively bought more than 1,000 tonnes of gold each year since 2022, more than double the average annual purchases in the prior decade. In 2022, when Western nations froze Russia’s dollar reserves in response to the Ukraine invasion, many other central bankers had an epiphany.

“Reserve managers…realised, maybe my reserves aren’t safe either. What if I buy gold and hold it in my own vaults?” explained Daan Struyven, a commodities strategist at Goldman Sachs.

In other words, countries like China, India, Turkey, and Poland (all among the leading gold buyers) are hoarding gold to reduce reliance on the US dollar and the global dollar-centric financial system. The fear is that dollar assets can be “weaponised,” meaning turned into tools of sanction or pressure in times of geopolitical strife.

Gold, by contrast, is sovereign. Holding gold gives these countries an asset that no foreign government can seize or block, a form of financial security amid rising East-West tensions. This structural shift in central bank behaviour has added a steady, price-supporting demand for gold that many analysts say is “unlikely to reverse in the near term,” even if the pace moderates. In short, central banks are effectively building a golden buffer against geopolitical and economic shocks, and that trend has helped propel the market upward.

Finally, market sentiment and investor behaviour have amplified gold’s climb. Success begets success in financial markets, and the sight of gold repeatedly breaking records has triggered a classic case of FOMO, or fear of missing out. From small retail investors to large institutions, many are now scrambling to “get a piece of the golden pie,” as one bullion dealer observed.

Exchange-Traded Funds (ETFs) focused on gold have seen surging inflows, as they offer an easy way for people to buy into the rally without handling physical bars or coins. These investment vehicles have magnified demand. Large funds buying gold on behalf of investors further push up the price, which in turn attracts even more buyers in a virtuous (or vicious) cycle.

“Even a small move out of the big stock market or bond market means a big percentage increase in the much smaller gold market,” Struyven notes.

That is, the gold market is tiny relative to stocks or bonds, so it doesn’t take a huge reallocation of global capital towards gold to make its price jump dramatically. With market volatility elsewhere (stocks and bonds both had rocky periods recently), a modest shift in portfolios toward gold has an outsized effect on its valuation.

Additionally, some investors are seeking insurance against a scenario of stagflation, meaning simultaneous economic stagnation and high inflation, which is a nightmare for most assets but historically a favourable backdrop for gold.

As one commentary succinctly put it, with the risk of stagflation unsettling markets, many are “seeking refuge from both recession and inflation threats” in gold. In sum, a blend of fear and momentum has gripped the gold market, drawn ever more buyers, and fuelled the boom.

Corrections and pitfalls

With gold glittering at record highs and headlines touting its surge, it’s easy to get caught up in the excitement. However, investing in gold during a boom carries its own set of risks and potential pitfalls. For one, the possibility of a sharp price correction or even a bursting bubble looms large whenever any asset rises this far, this fast.

History provides a sobering precedent. The last time gold saw a mania comparable to today’s was in the late 1970s. Spooked by oil shocks and stagflation, investors drove gold to then-record heights in January 1980. But the euphoria didn’t last, as prices crashed violently thereafter. In 1980, gold plunged from a peak of $850/oz (about $2,684 in today’s dollars) to nearly half that value within just three months.

By mid-1981, it had decreased a staggering 65% from its peak. More recently, after gold reached another peak of around $1,900/oz in 2011, amid post-financial crisis turmoil and Eurozone fears, it also experienced a significant decline. Within four months, prices were 18% lower, and the slide continued for two years until gold was roughly 35% below its 2011 high. Investors who bought near those peaks and assumed gold “could only go up” nursed painful losses for years.

Could today’s rally meet a similar fate? It is certainly a risk to consider. Gold may feel solid and timeless, but its market price is volatile and driven by fickle sentiment as much as fundamentals.

A key danger is that many new investors are piling in due to hype or fear of missing out, rather than careful analysis. When an asset becomes a popular talking point at dinner tables and on social media, as gold has now in some circles, it often means a lot of momentum-driven money is at play.

These latecomer investors can quickly exit at the first sign of bad news, accelerating a downturn. Analysts caution that a bout of good news, such as easing geopolitical tensions or stronger economic data that reduces uncertainty, could prick the balloon. For example, one strategist noted that gold prices briefly fell 1.4% following news of a US-China tariff agreement that de-escalated trade tensions, highlighting the price’s sensitivity to shifts in the outlook. If we were to witness several positive developments, such as a lasting peace in a conflict or a strong global growth rebound, the very factors that drove gold prices up could reverse, potentially causing a significant decline in value.

Another risk factor is gold’s lack of yield or cash flow. Unlike a stock that pays dividends or a bond that yields interest, gold provides no regular income to its holder. Investors rely solely on price appreciation to earn a return.

In a booming gold market, that may not seem to matter, since the asset is climbing 40% in a year. But if the price momentum stalls or reverses, gold holders don’t have any interest or dividends to cushion their total returns. Furthermore, if interest rates were to rise again (for instance, if central banks tighten policy to fight inflation), gold could lose favour.

Higher interest rates increase the appeal of interest-bearing assets relative to zero-yield gold. This dynamic was one reason gold languished through much of the 1980s and 1990s when central banks under Paul Volcker and successors kept real interest rates high to rein in inflation. Indeed, an investor who bought gold in 1990 had to wait about 14 years before the price recovered to that level in real terms.

During such long flat stretches, holding gold can mean a significant opportunity cost. Money tied up in gold is money not invested in stocks, bonds, or other assets that might be growing or paying income. As The Independent noted in a recent analysis, these “missed opportunities” are a real drawback of over-allocating to gold. In other words, if you go all-in on gold and it does nothing (or declines) for a decade, you might regret not having put at least some of that money into assets that were flourishing during that time.

Investors must also consider practical challenges and costs associated with gold. Buying physical gold means dealing with storage, insurance, and security, which can be costly and inconvenient. While many people now opt for gold ETFs or other financial instruments to sidestep these issues, those come with their own fees and, in some cases, tax considerations.

Additionally, gold markets can be influenced by factors beyond the average investor’s control, such as central bank actions or fluctuations in jewellery demand in key markets like India and China. These factors can introduce volatility. And if the market turns, gold’s liquidity can also dry up; in a panic sell-off, finding buyers at the last high price is not a given.

All these points boil down to a simple warning that, even during a boom, investing in gold is not a one-way bet. The metal’s famed stability refers to its long-term retention of value, not short-term price stability.

As Susannah Streeter, head of money and markets at Hargreaves Lansdown, aptly put it, “Short-term speculating can backfire,” and those lured by gold’s record run should be careful not to put all their eggs in one (golden) basket.

Gold deserves respect as a haven, but chasing it at peak prices without regard for the downside risks is a recipe that could leave an investor feeling, in hindsight, that all that glittered was not gold.

The big question on everyone’s mind is: How long can this gold boom last? Opinions among experts are divided on whether the market is nearing a peak or just catching its breath before climbing further. Some observers indeed worry that gold has entered bubble territory and that a significant correction is inevitable.

Jon Mills, an industry expert at Morningstar, grabbed headlines recently by predicting that the price of gold could plunge to around $1,820/ oz in the next few years. Such a drop would cut gold’s value nearly in half from its recent highs, a dramatic reversal.

Mills argues that today’s high prices will eventually encourage greater supply, as miners increase production and more individuals sell or recycle old gold. At the same time, some of the short-term demand drivers are likely to diminish. In his scenario, supply and demand would rebalance. A greater flow of gold into the market, plus waning buying by central banks and investors once the current fears subside, could cause the price to retreat significantly.

It is worth noting that since making that bearish call, even Mills acknowledged reality has shifted a bit. Mining costs have risen, and inflation has stayed stubborn, leading him to revise his downside target upward slightly.

The core of the cautionary outlook is that if today’s “perfect storm” of drivers fades, gold could surrender much of its gains. Investors would do well to remember that no asset is immune to economic gravity. Caution, diversification, and a clear-eyed view of one’s goals are essential. Gold can be a prudent part of an uncertainty strategy, but it is not a guarantee against loss or a substitute for a balanced approach.

Ultimately, gold endures as a glittering reflection of our shared hopes and fears. Its boom today signals deep-seated worries about tomorrow. Whether or not the bubble bursts, the true value of gold will likely endure, but the journey could be volatile.

By understanding the forces at play and by hedging bets wisely, investors and the public can avoid turning a haven into fool’s gold. In these unpredictable times, that may be the most important investment advice to heed.

The post Is gold’s rise too good to last? appeared first on International Finance.

However, the effectiveness of this strategy remains a subject of debate. Can governments cut public spending to fight inflation? By examining empirical data and case studies, we will evaluate the impact of reduced public expenditure on inflation rates and shed light on the potential downsides of this policy move.

According to the Bank of International Settlements, governments must either increase taxes or reduce expenditures after central banks keep interest rates too low for an extended period in the face of rising inflation, a phenomenon which started in 2022, coinciding with the Ukraine war.

According to the Basel-based organization, which provides advice to 63 central banks overseeing 95% of the world’s economic output, closing the gap between government income and expenditure would “calm down inflation.”

The institution stated that governments that are cutting down on spending or raising taxes would decrease business and consumer demand and be a crucial part of the “last leg” in the fight to tame inflation, which despite an intense run of interest rate rises by central banks around the world is far from over. To slow the rapid pace of price growth, however, this last push would also be the “hardest.”

The BIS took a firm stance amid worries that the United Kingdom’s economy is already entering a recession following abrupt interest rate increases, stating that increased taxes and less expenditure could “contain financial instability risks in multiple ways.”

It would lessen the need for further tightening of monetary policy, apart from providing “additional headroom” should public resources be called upon for crisis management in coordination with central banks.

“It would reduce the possibility that the sovereign becomes a source of financial instability,” BIS stated further.

Despite freezing personal income tax thresholds that will result in an increase of higher rate taxpayers over the next five years, Jeremy Hunt’s March 2023 budget somewhat relaxed the Rishi Sunak government’s purse constraints.

Conservative legislators are unlikely to approve increased taxes given that millions of working households are already dealing with rising mortgage payments and retail costs.

Relationship Between Public Spending & Inflation

Examining the underlying factors that drive inflation is crucial to understand the connection between public spending and inflation. Both demand-pull and cost-push factors can cause inflation.

Demand-pull inflation arises when aggregate demand outpaces the supply of goods and services, increasing prices. Cost-push inflation occurs when production costs rise, resulting in businesses passing higher costs to consumers.

Reducing public spending can directly impact aggregate demand by cutting government expenditure on goods, services, and welfare programs. This reduction in spending can help curb inflationary pressures stemming from excessive demand. However, the efficacy of this strategy depends on the extent to which public spending contributes to aggregate demand in a particular economy.

Amid concerns that the UK economy is already heading into a recession after a succession of sharp interest rate rises, the BIS took a tough line, saying higher taxes and lower spending could “contain financial instability risks in several ways.”

“It would reduce the need for monetary policy to tighten further. It would mitigate the risk that the sovereign itself becomes a source of financial instability,” it added, saying it would also “create more headroom should public resources be called upon for crisis management in concert with central banks.”

Jeremy Hunt’s budget loosened government purse strings slightly despite freezing income tax thresholds that will increase the number of higher-rate taxpayers by 2028.

The Taxpayers’ Alliance has called for further spending cuts but, in opposition to the argument by the BIS, said the funds generated should be used for tax cuts.

If efforts fail to reduce the inflation rate in the short term drastically, the impact on economies could be devastating, the Bank of International Settlements stated, warning that although inflation had come down from recent historic highs, there was still a serious risk posed by a prolonged crisis.

“The longer inflation is allowed to persist, the greater the likelihood that it becomes entrenched and the bigger the costs of quenching it,” the BIS said.

The United Kingdom hasn’t been able to follow the declining trend of European inflation and deservedly, now facing criticisms.

Recent calls for significant government interventions in areas such as financial support for British mortgage holders affected by higher monthly payments came after “decades of reliance on monetary and fiscal policy as de facto engines of growth,” according to the BIS report.

Case Studies On The Impact Of Spending Cuts

United Kingdom

In the early 2010s, the UK implemented austerity measures involving substantial cuts in public spending. Proponents argued that these measures would alleviate inflationary pressures.

However, the National Institute of Economic and Social Research (NIESR) found that austerity had a limited impact on inflation. The study revealed that while public spending reductions slightly lowered inflation in the short term, the long-term effects were negligible. Moreover, the cuts had adverse consequences, such as reduced public services and weakened economic growth.

Greece

During the sovereign debt crisis, Greece implemented severe austerity measures to tackle inflation and stabilize its economy. However, these measures had mixed results. While the move temporarily lowered inflation, the negative impacts on economic growth and social welfare were profound. GDP contracted, and unemployment rose, followed by social unrest, thus hampering the country’s recovery.

Downsides Of Cutting Public Spending

Drastic cuts in public spending can result in an economic downturn characterized by reduced consumer spending and business investments. This can further exacerbate the inflationary pressures arising from weakened economic activity.

Also, reductions in public spending often translate into reduced social welfare programs, healthcare services, and infrastructure investments. Such austerity measures disproportionately affect vulnerable populations, increasing social inequality and hardships for those relying on public assistance.

Public spending on education, research, development, and infrastructure can contribute to long-term productivity gains and creation. Cutting these expenditures can hamper the potential for future economic growth and reduce a country’s competitive edge in the global market.

Also, overly aggressive cuts in public spending can push an economy into a deflationary spiral. Deflation, characterized by a persistent price decline, can lead to decreased consumer spending and business investments, exacerbating economic stagnation.

Conclusion

While reducing public spending may offer short-term relief in curbing inflation, the long-term effectiveness of this strategy still needs to be investigated. Case studies in countries like the UK and Greece demonstrate the limited impact of such measures, coupled with significant social and economic costs. Governments must consider a balanced approach.

The post IF Insights: Can governments cut public spending to fight inflation? appeared first on International Finance.

Nuno Fernandes regularly advises companies and financial institutions in Asia, Europe, Latin America, and the Middle East. He has delivered speeches and conducted workshops for well-known companies around the world.

A regular contributor to international media – including The Financial Times, Forbes, and The Wall Street Journal – Professor Fernandes is the author of several other books, including Finance for Executives: A Practical Guide for Managers (second edition), and The Value Killers: How Mergers and Acquisitions Cost Companies Billions—And How to Prevent It.

In the past, Nuno Fernandes was the Dean of Católica-Lisbon, and Professor of Finance at IMD in Switzerland. He has received numerous teaching and research awards and has been published in leading international academic journals, including the Journal of Financial Economics, Review of Financial Studies, and Harvard Business Review. In 2022, he won the “Outstanding Teacher” award, in The Case Centre’s Worldwide Competition, also known as “business education’s Oscars.” He earned his PhD in Management (Finance) from IESE Business School, and a degree in Economics from Universidade Católica Portuguesa.

In his interview with the International Finance Magazine, Nuno Fernandes shares his insights about his new book Climate Finance, Green Investing, M&As, climate risks, role of Central Banks in Climate Finance, and much more.

Q) Can you shed some light on your new book Climate Finance?

A) Three years ago, I started to work on this book, as I wanted more people to be aware of the massive impact that climate change can have on financial markets, and companies overall. Moreover, what could the finance world do to contribute to this massive global challenge.

Climate change is not a possible future risk. It has already started to impact human life and the worst effects are yet to come. Avoiding those extreme impacts represents an unprecedented challenge for humanity. A huge level of investment is required to meet the Paris Agreement goals. Given the magnitude of the challenge, it is clear that public investment alone will not be enough. Private sector funds need to be channelled into the new investment opportunities.

Climate change poses risks to companies, banks, governments, and investors, but also opens up opportunities. And my new book, Climate Finance, covers sustainable finance topics and climate-related frameworks, balancing investor and corporate needs.

Banks and financial investors can serve as enablers of a smooth transition and help properly allocate capital and risks. Every type of investor will be involved in different ways: by investing in private equity funds or directly in projects, buying bonds or equities, or investing in global funds that diversify their savings.

Several financial instruments are novel, and some aspects of their structure and best practices are still being developed. The book provides practical and applied concepts that are firmly grounded in reality, highlighting evidence from markets, academic research, and practical case studies featuring leading companies and investors.

Q) How is climate linked to finance? Can you elaborate?

A) Finance is about linking demand for capital (typically companies), to suppliers of capital (e.g. investors and financial institutions). Defined in this broad sense, Finance (including financial players such as shareholders, debtholders, capital markets, regulators/central banks, and boards) has an important role to play in tackling the challenges ahead.

Climate impacts Finance. For instance, climate change affects a company’s fundamentals, and thus markets overall. Climate change brings new risks and opportunities for companies, and this has obvious financial implications. And investors do care about these, and are engaging with companies so that they provide additional disclosures, stress tests, manage the exposure to stranded assets, or have clearer low-carbon transition strategies.

But Finance also impacts Climate. Calls for action to address the climate crisis come from company stakeholders (customers, employees, etc.), world leaders, regulators, and investors. These changes in consumption attitudes affect the way companies design their strategies, as they strive to meet the consumer demand for more responsible products. Consequently, large companies, such as automotive companies, are also asking their suppliers to be more environment-friendly. This leads to a higher demand for financial instruments related to climate change. Indeed, the different finance tools, new ESG metrics, and new financial instruments such as green bonds or sustainability-linked loans, all contribute towards companies taking concrete actions to reduce their carbon footprint, and thus help in the transition.

Therefore, it goes both ways. Climate impacts Finance. But Finance also impacts Climate.

Q) Why does climate finance matter?

A) Climate-related risks affect financial markets. Corporate fundamentals will change. The profitability change will vary from sector to sector. Some companies and industries are better positioned than others for a low-carbon economy. Not only because of policy/regulations regarding emissions or carbon taxes but repricing of assets is also another way in which climate change impacts investments, collateral values, and balance sheets throughout the world. As a consequence of shifts in risk perceptions and societal preferences, the price that investors are willing to pay for different assets is changing, and so is the risk they attribute to them.

The world’s largest investor, Larry Fink, Chief Executive Officer of BlackRock, has issued several warnings in his annual letters to shareholders. Many more long-term investors, including pension funds, sovereign funds, and others, are increasingly concerned that failure to act could endanger the long-term returns on their assets.

Besides, a big funding gap exists between what we have right now (the Paris Agreement signatures) and what we need to have in the future (the actual infrastructure, supply chains, and corporate frameworks to deliver on those agreements). Bridging this gap should now be the priority for executives, board members, and shareholders. Finance plays an important role in the development of instruments used to address this gap. By properly using tools such as green bonds or loans, companies introduce climate change in their long-run strategic portfolios, and thereby help them in their transition.

Corporate action will be crucial for obtaining the funds needed to fulfil the carbon neutrality goals, and most of the required investment will come from the private sector. Market-based finance is a key pillar in this process. Capital markets, the intermediary between savings and corporate investments, can be used to close the investment gap.

Q) How are companies responding to the stranded assets problem?

A) Stranded assets are assets that suffered premature write-downs, devaluations, or conversion into liabilities. In other words, stranded assets are assets that, despite being productive from a purely operational point of view, are no longer economically viable due to changing regulations and consumer tastes. They are particularly concentrated in some sectors, and they are important for countries that depend on commodity exports.

For instance, in the energy sector, given the global commitments to the reduction of CO2 emissions, there is a real possibility that the value of oil and some other carbon-related assets may become zero. In fact, achieving the Paris Agreement’s long-term temperature targets will certainly result in several billion barrels of reserves unutilized. Investors will tend to shift their capital away from carbon-intensive sectors and direct them to carbon-efficient companies, projects, and technologies.

However, the stranded assets problem can affect economies globally as economic and financial systems are interconnected. Stranded assets are not restricted to the fossil fuel sector. For instance, in the agriculture sector, land degradation, extreme weather events, and wildfires can destroy crops, affect livestock farming, and transform these assets into stranded assets. Also, agricultural assets can become stranded because of the greening of the supply chain, shifts in consumer behaviour or political changes, and environmental regulation. This is why this will also hit advanced economies through the interconnections of the global economy and through ownership and lending positions in the global financial system.

At the company level, assets on the balance sheets of companies operating in the fossil fuel industry (and others) are likely to become impaired. This means that companies will need to decrease the value of assets on the balance sheet and recognize an extraordinary loss in the income statement in that period. Erosion of assets from the balance sheet has capital structure implications, as the leverage ratios of the company will rise. If some highly leveraged firms were hit by losses due to stranded assets, they would be unable to service their debt obligations. For example, in early 2021, S&P downgraded the credit rating of three U.S. companies – Chevron Corporation, Exxon Mobil Corporation, and ConocoPhillips – mentioning “pressure to tackle climate change” among the causes.

Companies operating in highly polluting industries can reduce their environmental risks and mitigate stranded asset risk in a variety of ways:

Divesting old/polluting assets: An oil company can sell off old and obsolete assets such as refineries or oil wells and diversify its portfolio to include renewable energy.

Not reinvesting into the old business: A company can choose not to reinvest in old (and polluting) assets and favour new investments in sustainable assets. This can be done by investing a gradually smaller proportion of the earnings into sectors/products that are “at risk.”

Sourcing differently: A company can radically transform its supply chain and operating model, reduce its energy consumption, and switch to less carbon-intensive forms of energy supply.

Using M&As to transform their portfolio: By acquiring new technologies and pipelines of cleaner products, a company can sometimes transform its business faster than the organic rate of change.

Q) What is European Union’s contribution to international climate finance? How important has their contribution been?

A) Although finance (and the various financial actors) can play a role in mobilizing savings toward climate-related goals and investments, policies and regulations also play a role. The first step is to introduce a fiscal policy that incorporates the pricing of externalities, which is related to carbon taxes and fuel subsidies. It is important to recognize that political economy aspects are involved.

A priority in capital markets regulation is to clarify definitions related to sustainable finance. A lack of clarity as to what constitutes a green loan, green bond, and other green activities hinders banks, companies, and investors and increases the potential for greenwashing activities.

In the EU, the European Commission launched its Action Plan on Financing Sustainable Growth to meet the 2030 targets that it has committed to, in line with the Paris Agreement. This includes several policy initiatives to direct capital toward low-carbon projects, allow better management of the financial risks associated with climate change, and foster transparency in financial and economic activities. In March 2020, it published the Final Report, which details the following:

An EU classification system of sustainable activities (the EU Taxonomy): Provides a classification framework for sustainable economic activities. Its objective is to provide a common language and uniform criteria that corporates and investors can use to describe environment-friendly activities.

An EU Green Bond Standard: Represents the European guideline for green bond issuers, and complements the Green Bond Principles (by the International Capital Market Association). It aims to promote transparency and comparability in the green bond market, as well as support its growth.

Methodologies for EU climate benchmarks and disclosures for benchmarks.

Consistent labelling and disclosure of funds to enable investors to make informed choices.

Guidance for institutional investors on their disclosures, including how to factor in investor preferences and integrate ESG into their investment processes.

Guidance to improve corporate disclosure of climate-related information.

Q) Can you give your insights about Green Investing? Is investing in Green Bonds & Green Funds profitable for investors?

A) Several papers have examined whether companies with strong ESG credentials also have enhanced profitability and value, what is sometimes referred to as “doing well by doing good.” Also, there is some empirical research on the implications of climate risk and ESG in general for investors. Overall, the evidence is mixed, and it is difficult to establish causality, especially for issues such as climate change risks, for which very limited data time series are available.

I would like to highlight one thing. Despite anecdotal evidence provided by commentators, newspapers, and consultant reports, there is no scientific evidence suggesting superior performance by high-ESG funds in the long run. This does not mean that investors should not consider climate issues and sustainability in their investment decisions. Of course, they do, as it impacts cash flows, risk, and growth opportunities.

It is important to remember that firms with lower risk should have lower expected returns or cost of capital. However, during a transition period, we may observe high returns for sustainability-related strategies. Past returns do not predict future returns, and past average returns definitely do not necessarily imply strong expected returns in the future.

Finally, it is sometimes assumed that everyone (investors in particular) seeks to maximize performance or shareholder value. Some investors, however, have different utility functions. If the values and goals of these investors align with sustainability considerations, then they pursue these strategies even if they do not promise superior performance.

However, we should also not overestimate the objective of “doing good for the world” as a driving force of financial flows. It is important to realize that maximizing risk-adjusted returns is likely to remain the primary consideration for most investors.

Q) How can companies use M&As to improve their environmental performance?

A) Climate considerations are becoming increasingly important in M&As. Mergers can be used by companies to “green” their portfolio quickly, acquire cleaner technology, and better comply with the expectations of stakeholders, including regulators. Large players have been using mergers to close technological and business model gaps in their portfolios, and quickly become more environmentally conscious.

M&As will be especially important in certain sectors such as oil and gas, as producers need to invest in the transition from fossil fuel to cleaner energy sources. In other cases, the goal can be to acquire energy-saving or emission-reducing technologies, or to move the business toward other low-pollution sectors.

However, M&As pose significant challenges. Some of the more important of these are paying attention to overpayment, accountability in the integration, and communication with different stakeholders, including employees.

Overall, climate-risk factors can affect the likelihood of a deal being closed, and environmental due diligence is necessary for most mergers. Poor performance on environmental issues can negatively impact the valuation, and it can be used to negotiate the price down. However, in some cases, value and efficiency can be increased after the deal, by bringing the target assets to the same level of ESG performance as the acquirer. This requires the integration to focus on improving the ESG factors of the target and thus bring its poor ESG performance on par with that of the acquirer.

Q) What is the importance of climate risks for institutional investors?

A) Institutional investors are the largest holders of shares in publicly traded companies worldwide. They are also the majority holders of bonds (corporate and government). Therefore, it is obvious that they are key players in the low-carbon transition.

When we talk about institutional investors this includes asset managers, sovereign wealth funds, pension funds, and other types of investors. Many of these investors have a long-term orientation and are concerned about the long-term implications of climate change on their portfolios’ returns and risk.

Most institutional investors believe that climate risks have financial implications for their portfolio firms, and that these risks, especially regulatory risks, already have begun to materialize. Besides being a scientific reality, climate change is also an economic reality, and thus, it is a relevant investment issue. As a result, they are increasingly incorporating environmental information into their financial analysis and investment decisions.

There are different strategies used by these investors, such as screening, integration, exit or engagement. There is still limited empirical evidence on how different investors apply investment strategies, and their relative effectiveness. The little empirical evidence that exists suggests one has to be careful about greenwashing and initiatives on sustainability that are simply PR efforts without any concrete impact. The evidence also suggests that engagement seems to be more effective than divestment in achieving positive environmental results.

Q) What impact will Central Banks have on Climate Finance?

A) Central Banks are important players in financial markets. To begin with, they are responsible for implementing monetary policy, in which role they affect interest rates as we are seeing in the last few months. Importantly, Central Banks are also large buyers of financial products, namely, bonds for their portfolios. In addition, many of them are responsible for regulating the financial sector and ensuring financial stability.

In their different roles, they can use various tools to influence the climate transition. For instance, in bond purchase programs, Central Banks can use portfolio tilts, or exclusion lists, to direct their purchases toward greener assets. That is, while implementing bond purchase programs, Central Banks can influence the relative size, and rates, of different bond markets.

In supervising the financial sector, different operational tools can be used, including reserve requirements, collateral restrictions, and overall prudential regulation tools such as capital ratios and disclosures.

Further, many Central Banks are incorporating climate considerations internally. For instance, EU Central Banks agreed, in February 2021, on a standardized reporting of their own portfolio carbon footprint, along the lines of the TCFD.

However, it is important to consider that all these changes have consequences, costs, and distributional effects, and the availability of data that can justify future changes is a significant challenge. What Central Banks and financial regulators will do to support a smooth low-carbon transition will depend on what their mandate allows, how this is interpreted, and their willingness to act. Moreover, the mandates and policy tools differ significantly across countries.

Q) You claim that your book will be helpful for corporate managers, investors, executives, regulators and central bankers. What insights are you providing them?

A) This book provides an in-depth understanding of the various aspects of climate finance, from the risks and opportunities to the demand and supply of capital, to the impact of global policies. It presents frameworks to help readers better understand the sustainable finance field and the link between finance and climate. It allows the reader to assess their contributions, risks, opportunities and personal role in the coming transition. It also helps investors and companies make more informed capital allocation decisions by appropriately incorporating all risks.

If your work deals with finance, you must understand how the real-world impacts of climate change are reshaping stakeholders’ expectations. Businesses cannot sit back and be passive spectators of the government’s actions. Rather, they need to participate in efforts to combat climate change and contribute in different ways.

In addition to being a useful guide for finance leaders and practitioners, this book can also be used in business education (MBA, master’s, and executive education programs). It is based on many years of teaching and consulting with world-class corporations from all continents of the world.

Climate Finance will help you be part of the solution to the greatest challenge facing humankind today. The book will help you make the right choices and take meaningful action to protect the long-term interests of your organization against the financial threats posed by climate change.

The post Climate change brings new risks for companies: Finance Expert Nuno Fernandes appeared first on International Finance.

But compared to the 1990s and the first part of the 2000s, where these central banks were net sellers of gold, the acquisition figures of 2022 represent a sharp contrast. That year, these financial institutions snapped up gold at the fastest pace since 1967.

Why Do Central Banks Purchase Gold?

In the financial reserves of countries, gold is significant. These are three explanations for why central banks keep gold:

Keeping Foreign Exchange Reserves In Check

Central banks have historically held gold as part of their reserves to control the risk associated with their overall currency holdings and foster stability during economic headwinds.

Protecting Oneself From Fiat Money

Gold protects from the erosion of a currency’s purchasing power brought on by inflation, particularly the US dollar, which only gets stronger with every Fed rate hike, as seen in 2022.

Adding Variety To Portfolios

The value of gold is inversely correlated with that of the dollar. As a result, gold prices typically increase when the value of the dollar declines, shielding central banks from volatility.

Selling To Purchasing Transition

Central banks sold gold on the net in the 1990s and the first part of the 2000s.

Selling occurred for several reasons, including favourable macroeconomic circumstances and declining gold prices. In addition, strong economic growth reduced the value of gold’s safe-haven characteristics, and its low returns made it unattractive as an investment.

During the 1997 Asian financial crisis and the 2007–2008 financial crisis, central banks began changing their views on gold. As a result, annually since 2010, central banks have been net gold buyers.

Between 1999 and 2021, the top 10 official purchasers of gold accounted for 84% of all purchases made by central banks.

The major gold buyers since 2003 have been China and Russia, the adversaries of the United States. However, Russia increased its gold purchasing after being subjected to Western sanctions due to its Crimea invasion in 2014.

Under the Central Bank Gold Agreement (CBGA) framework, European countries like Switzerland, France, the Netherlands, and the United Kingdom were the most significant gold sellers between 1999 and 2021.

Which Central Banks Purchased Gold In 2022?

Central banks purchased a record 1,136 tonnes of gold in 2022, totalling over USD 70 billion.

Turkey was the biggest gold importer, which as of October 2022 has an annual inflation rate of 86%. They added 148 tonnes to their reserves. With escalating geopolitical tensions with the United States, China resumed its gold buying binge, adding 62 tonnes in 2022 November and December.

Nevertheless, emerging markets, which accounted for the majority of gold purchases, followed the trend that began in the 2000s. In contrast, two-thirds, or 741 tonnes, of official gold acquisitions in 2022 went unrecorded.

Analysts believe nations like China and Russia, attempting to de-dollarize international trade to get around Western sanctions, are the most likely sources of unreported gold transactions, which amount to almost 2/3rd of total gold purchases.

The post How central banks used gold since the 1990s appeared first on International Finance.

So what is stagflation?
Stagflation is a mashed-up term that joins stagnation and inflation together. Stagflation is different from a recession. In a recession, unemployment is high, demand is weak, and purchasing power is low. In stagflation, all of the above is true, but prices of commodities and services still go up. Investopedia defines stagflation as the combination of slow economic growth along with high unemployment and high inflation.

Usually, a recession corrects itself, as unemployment leads to low purchasing power. When consumers cannot afford products, demand dies, reducing the costs of goods and services. However, despite weak demand, prices are likely to climb this time. Stagflation is a prolonged period of low growth and is much worse than a recession.

Why is it here?
Like most economic issues, you cannot pinpoint exact causes and effects. Many global developments contributed to the onset of stagflation, including the pandemic, war in Europe, supply chain disruptions in China, and even changes in consumer spending habits and monetary policies of world governments and central banks. Oil price shocks similar to the 70s contribute to the aggravating situation.

Can it be avoided?
David Wilcox, a senior economist at the Peterson Institute for International Economics and Bloomberg Economics, says that recession is the only cure for stagflation.

The Fed and most other central banks believe that an economy recovers quicker from a recession with high unemployment than from stagflation, where consumer goods prices keep soaring. So they aggressively hike interest rates to dissuade borrowing and slow down the economy. Such an action might hamper growth and increase unemployment, which kickstarts a recession from which the economy can later recover. Only time can tell how effective this method is.

In economics -if the future seems bleak, it becomes a self-fulfilling prophecy. The world bank reduced its global economic growth forecast from 4.1% in January to 2.9%in June.

How does it affect you?
During the stagflationary period, companies projecting nothing but growth for decades might slow down due to weak demand. If you are an investor, your assets are unlikely to give back the dividends they used to and can even depreciate. If you are a worker, your job security is at stake, as weak demand lowers production and leads to layoffs. Governments collect fewer taxes, and spending may reduce, leading to poor government infrastructures and free-falling currencies. If you run a household, your budget would be constrained due to expensive goods and lower purchasing power. And finally, if you are a business or home owner you are less likely to avail loans because of the higher interest rates on borrowing, scrapping expansionary goals.

The post What is stagflation? And how does it affect you? appeared first on International Finance.