Latest / The Emerging Markets Podcast with Fexingo: Developing Economies, Growth, and Investment / How Emerging Markets Are Betting on Gold Reserves
Transcript
- Lucas: So Luna, the trade-weighted dollar index just hit 119.7, essentially a two-decade high. And yet, some emerging market currencies are holding up better than you'd expect. The yuan is flat at 6.75. The won is actually up big this week. What gives? Luna: I'd say part of the answer is a quiet revolution in central bank reserve management. They're not just sitting in US Treasuries anymore. Lucas: Exactly. We've talked about the dumping of Treasuries before, but the flip side is what they're buying instead. And the answer, increasingly, is gold. The World Gold Council just released their latest survey, and central banks bought 483 tonnes in Q2 2026 alone. That's the fastest quarterly pace in two decades. Luna: 483 tonnes in one quarter. That's like... I mean, that's bigger than the entire annual production of some mid-tier mining countries. Lucas: Right, and it's not just the usual suspects like China and Russia. Poland has been a massive buyer, and we're seeing new entrants like Iraq, India, and even some smaller African nations. The survey shows that 74 percent of emerging market central banks plan to increase their gold holdings over the next twelve months. That's up from 61 percent last year. Luna: So what's driving this? Is it just the strong dollar, or is there something bigger going on? Lucas: I think it's a mix of geopolitics and financial pragmatism. Dollar strength makes imports more expensive for EM countries, especially energy importers. Holding gold is a hedge against that. But there's also a diversification story. After the freezing of Russian assets in 2022, a lot of EM central banks looked at their US Treasury holdings and thought, 'If that can happen to Russia, it can happen to anyone.' Gold is seen as a neutral, sanctions-proof asset. Luna: And it's not just about safety. Gold has been performing well. It's up about 22 percent year-to-date, which is better than most EM equities or bonds. Lucas: That's the interesting part. Gold is a non-yielding asset, but when the dollar is this strong, it can actually be a better store of value than a lot of EM currencies. And for central banks, the goal isn't returns — it's stability. If your reserves are in gold, you're less exposed to US monetary policy swings. Luna: And that gives them more room to manage their own currencies, right? Like, if you have a big gold buffer, you can intervene in the FX market without depleting your dollar reserves. Lucas: Precisely. The Bank of Poland has been explicit about that. They've said gold bolsters Poland's financial security and gives them more policy independent. And we're seeing that play out in the data. The zloty has been relatively stable against the dollar this year, even as the dollar index rallied. Luna: It's like they're building a fortress balance sheet. Gold is the moat. Lucas: Ha, that's a good way to put it. And you know, as we dig into these numbers, I'm reminded of how much we rely on the data that makes these conversations concrete. If walking through the economy with us has made something click for you, and you want to keep the podcast free and independent, you could consider supporting the show at buy me a coffee dot com slash fexingo. That's spelled F-E-X-I-N-G-O. It genuinely helps us keep doing the deep dives without ads. Luna: Yeah, every little bit counts. And it keeps us ad-free, which we love. Alright, back to the gold rush. So, Lucas, what does this mean for the average EM investor? Should they be buying gold ETFs, or is this just a central bank phenomenon? Lucas: Good question. It's not just central banks. Retail and institutional investors in EM are piling into gold ETFs as well. In the first half of 2026, emerging market-domiciled gold ETFs saw their biggest inflows on record. And that's partly a response to the same forces: dollar strength, geopolitical risk, and a search for safe haven assets that aren't us centric. Luna: So it's a retail mirror of the central bank behavior. But gold doesn't pay dividends. Isn't that a tough sell in a market where EM dividend stocks are making a comeback? Lucas: It is a tough sell for income investors, sure. But gold has a different role in a portfolio. It's diversifier. When EM equities are volatile — and they have been this month, just look at the whipsaw in China — gold tends to hold its value or even appreciate. So it's more about capital preservation than income generation. Luna: And it's also a hedge against currency depreciation. If your local currency is sliding against the dollar, gold can protect your purchasing power. I guess we should talk about the risks, though. Gold doesn't yield anything, and it can be volatile in the short term. There's also the opportunity cost of not holding other assets. Lucas: Right, and there's the storage issue for central banks. You can't just hold gold in a digital ledger. You need physical vaults, insurance, transport. That's why some smaller EMs might prefer to hold dollars in the form of US Treasuries, which are easier to move and earn interest. But the survey shows they're willing to take on that complexity. Luna: And what about the impact on EM debt? If central banks are shifting into gold, are they selling Treasuries and that's pushing up yields, which then makes EM borrowing more expensive? Lucas: That's the tricky part. We've seen EM central banks trim their Treasury holdings over the past few years. But the gold buying is not necessarily a direct swap. They're also accumulating gold with export revenues, especially in countries that export commodities. So it's more of a diversification of the overall reserve pool, not a one-for-one sale of Treasuries. Luna: But the trend is clear. The dollar's dominance is being chipped away, at the margin. And that has long-term implications for the US's ability to finance its deficits — which, by the way, just hit a goods and services trade deficit of 73 billion in June, up from 77 billion the month before. So the trade deficit is actually narrowing a bit, but it's still huge. Lucas: Yeah, and if foreign central banks are less willing to hold US Treasuries, that puts more pressure on the dollar, which in turn could feed back into EM currencies. But it's a slow burn. The dollar is still 59 percent of global reserves, gold is only 16 percent. So we're not seeing a revolution, but a gradual shift. Luna: And that gradual shift is exactly what investors should pay attention to. Because it's not going to reverse overnight. So if you're an EM investor, how do you play this? Do you buy gold miners in EM, or the physical metal, or just hold more cash? Lucas: I'd say physical gold or a low-cost gold ETF is the cleanest way. EM gold miners can be levered plays, but they come with operational risks, political risks, currency risks. The central banks are buying the metal, not the miners. So if you want to mirror that, you'd buy the metal. Luna: And what about the timing? Gold is near all-time highs. Is it too late to get in? Lucas: You know, that's the billion-dollar question. But I'd argue the structural drivers — central bank diversification, geopolitical tensions, and the persistent dollar strength — are still in place. As long as those are there, gold can continue to move higher, even if it's not a straight line. I wouldn't chase it, but I wouldn't ignore it either. Luna: And for the EM central banks, is there a downside? Holding gold doesn't earn interest, so they're giving up yield. But with the Fed expected to cut rates next year, the opportunity cost is lower. Lucas: Exactly. If real rates are going to stay low, gold becomes more attractive. And we've seen some EM central banks like the Bank of Korea actually increase their gold holdings for the first time in years. The won has been strong, and they're using some of that strength to diversify. Luna: So it's a strategic move, not a panic move. They're doing it from a position of strength, not weakness. Lucas: Precisely. And that's why I think this is a more durable trend than the gold buying we saw in 2008 or 2012. Back then, it was about hedging against financial crisis. Now, it's about long-term reserve architecture. Luna: Let's talk about the specific countries. Who's leading the charge in the second quarter? I know Poland has been a major buyer, but who else? Lucas: Poland bought about 42 tonnes in Q2, bringing their total to over 400 tonnes. China's central bank has been buying for 20 straight months, adding roughly 30 tonnes in Q2. India, Iraq, and Turkey were also in the top five. The World Gold Council noted that the buying is broad-based, not concentrated in a few large holders. Luna: And what about the demand from Russia? I know they've been locked out of some markets, but they're still a major producer. Lucas: Russia is a bit of a different story. They're a large producer, but they've also been accumulating gold as a way to circumvent sanctions. It's harder to get the exact numbers, but the estimates suggest they're still net buyers. However, the more interesting trend is the EM countries that have traditionally been less active, like South Africa and Brazil, starting to get back into the gold market. Luna: So it's not just China and Russia. It's a global EM phenomenon. That makes it more significant for the global monetary system, doesn't it? Lucas: It does. When you have a broad coalition of emerging markets diversifying out of the dollar, it chips away at the dollar's reserve currency status. Not overnight, but over time. And that has implications for US borrowing costs, trade dynamics, and the value of the dollar itself. Luna: And for EM currencies, a stronger gold reserve base could provide a floor. If investors see that a central bank has a big gold hoard, they might have more confidence in the currency. Lucas: Absolutely. It's a signal of fiscal strength and independence. That's why we're seeing some EM currencies outperform the dollar despite the strong dollar index. The market is pricing in that these central banks have more tools to defend their currencies. Luna: So, as we look ahead, what should listeners be watching for in the next few months? Any key data points? Lucas: The World Gold Council will release their next quarterly report in October. That will show if the buying pace continues. Also, keep an eye on the Fed's rate decisions. If they cut rates, gold could get another boost. And watch the geopolitical headlines — tensions in the Middle East, for example, could accelerate the trend. Luna: And we should mention that the VIX is relatively calm, but that could change. If we see a spike in volatility, gold might really shine. Lucas: Right. And on that note, I think we've given everyone a lot to think about. The gold rush among EM central banks is a story that's just starting to unfold. It's not just about shiny metal; it's about the future of the global financial system. Luna: And it's a story we'll be following closely. Thanks for joining us on this episode of The Emerging Markets Podcast.