The Dutch central bank recently decided to move a portion of its gold reserves back from New York, explicitly citing "geopolitical turmoil" as a motivating factor. At the same time, Norway's $2.4 trillion sovereign wealth fund has proposed slashing its allocation of government bonds from 70% to 50%, which would reduce its holdings of US Treasuries.
These actions come against a backdrop of increasingly aggressive US foreign policy. Last year, the Trump administration launched a global tariff war, forcibly took control of Venezuelan leader Nicolas Maduro in January, initiated a war with Iran in February, and unveiled a plan in late August to seize control of over 65 billion barrels of Venezuelan oil. Relations with European and NATO allies have also been strained, with the administration expressing ambitions to acquire Greenland and its natural resources, while the trade dispute with Canada has escalated recently. This raises a critical question: is global confidence in the US financial system eroding?
"This is more about the irrational behavior of the US President," said Steven Blitz, Chief US Economist at GlobalData TS Lombard, referring to Trump's Friday threat to curtail trade with certain countries unless the Federal Reserve makes substantial rate cuts. Blitz questioned, "Who can guarantee he won't suddenly decide that the gold held in New York cannot leave the country?" While he assesses the likelihood as low, he notes it's sensible for global central banks to consider this risk until Trump's second term concludes in January 2029 and US policy becomes clearer. "In the meantime, is it prudent for the Dutch central bank to move its gold? Yes, I can understand that," Blitz added.
Nations have long treated gold as a reserve asset, serving both as a safe store of value and a hard asset that can be liquidated for cash. Following World War II, it became customary for countries to deposit their bullion in the New York Federal Reserve's vaults. However, this tradition is shifting. France recently sold its last gold holdings in New York, executing a swap and netting a profit of roughly $15 billion. Germany completed a major gold transfer back during Trump's first term. "I think this is more about control than geography," said Max Baecker, President of precious metals dealer American Hartford Gold. "Central banks want to ensure they can access and mobilize their gold when needed." A White House official maintains that America's post-war leadership remains intact, and that it was exactly this status that originally prompted countries to store their gold in New York.
Beyond gold, US Treasuries remain a vital reserve asset for central banks worldwide. Central banks are typically less sensitive to short-term price swings than institutional or individual investors, and their long-term participation helps bolster the appeal of the Treasury market. According to the World Gold Council, the US holds over 8,000 tonnes of gold, ranking first globally, followed by Germany, France, and Italy. The Netherlands possesses about 1,300 tonnes, representing roughly 55% of its total reserves. This re-evaluation of where gold is stored comes on the heels of a massive surge in gold prices. Sustained strength has defined the market since the Russia-Ukraine conflict began in 2022. FactSet data shows gold hit a record high of approximately $5,600 per ounce in January, compared to around $2,000 four years ago, and currently hovers near $4,477.
"My advice on gold is: having some doesn't hurt, especially if it helps you sleep better at night," said Jim Baird, Chief Investment Officer at Plante Moran Investment Advisors. However, Baird doesn't advocate for converting all assets into gold and "burying it in the backyard." Despite the US national debt reaching $40 trillion this summer, he believes the old adage about "the best house in a bad neighborhood" still applies. "With all our problems, is there another market with the depth or liquidity of the US Treasury market? The answer is no," Baird said.
The escalating US debt and inflation concerns stemming from the Iran war are already reflected in the bond market. The yield on the benchmark 10-year Treasury rose from 4% when the Middle East conflict began in March to about 4.8% in September. Should yields climb further, risks could amplify, including a decline in market confidence in the US and the Fed's ability to control inflation, potentially leading to fewer buyers of US debt. "I'd watch to see if it breaks 5% and stays there for more than a week or two," said Stephanie Link, Chief Investment Strategist at Hightower Advisors. "That would be an interesting signal."
The share of US Treasuries held by foreign investors has been on a downward trajectory. After the 2008 global financial crisis, this figure approached 56%, but it has since fallen to roughly 31% last year. "In the past, when market volatility got too high, people would start asking about buying Treasuries," noted Bob Edwards, Chief Investment Officer at Edwards Asset Management. However, with inflation still a concern, Edwards is guiding clients toward "boring" dividend-paying stocks and recommending reducing risk exposure after the significant rally in AI-related assets. The US government's persistent massive fiscal deficits also add pressure to the long-dated bond market. Mike Treacy, Vice President of Risk at Apex Fintech Solutions, points out that one market reaction has been higher yields on 10-year and 30-year Treasuries. "As long-term rates go up, demand for gold itself also increases," Treacy said. Nevertheless, he doesn't believe any "fading" of America's financial standing is necessarily permanent. The US political landscape could still change, especially after the November midterm elections. "Judgments made today could be very different in two years, or even in two months," Treacy said. "Geopolitics is cyclical," he added.
Comments