On September 16, the US Federal Reserve raised its policy rate by a quarter percentage point, bringing the target range to 3.75–4 per cent. It was the first increase since 2023, and the decision was unanimous. The Federal Reserve said inflation remained elevated and indicated that further tightening could be necessary. Most policymakers reportedly expect at least one additional increase before the end of the year.The textbook response of the gold market to such a decision is familiar. Gold pays no interest. When the return on relatively safe, interest-bearing assets rises, the opportunity cost of holding gold increases. In ordinary circumstances, this should place downward pressure on its price.History offers examples. Gold weakened sharply during the early 1980s, when then-Federal Reserve chairman Paul Volcker raised interest rates to exceptionally high levels. It also declined significantly during the 2013 “taper tantrum”, when markets reacted to indications that the Fed would reduce its bond purchases.The present environment, however, is more complicated. Gold has remained at historically elevated levels despite higher real interest rates. The relationship between yields and gold has not disappeared, but it appears less consistent than conventional models might suggest.The familiar explanations remain relevant: persistent inflation, geopolitical instability, concerns about currency values and sustained purchases by central banks. The World Gold Council’s 2026 survey found that 89 per cent of respondents expected global official gold reserves to increase over the following 12 months, while 45 per cent expected their own institutions to increase holdings. The survey also found that 74 per cent expected the US dollar’s share of global reserves to decline over the next five years. These figures represent expectations rather than confirmed future actions, but they indicate how reserve managers are thinking about diversification.A further consideration receives less attention: where gold is stored, and which legal jurisdiction governs it.What Higher Rates Do to a Sovereign Balance SheetHigher interest rates are not merely an input into financial-asset pricing. They also increase borrowing costs for governments. The United States continues to benefit from the dollar’s central position in the global financial system and from the depth and liquidity of its Treasury market. Nevertheless, its growing debt and rising interest obligations have become important issues for investors and reserve managers.The US national debt passed $40 trillion in 2026, while the fiscal-year deficit had reached approximately $1.97 trillion by August, according to reporting based on government data. The annual cost of servicing federal debt has also moved above $1 trillion. These figures do not, by themselves, indicate an imminent credit crisis. They demonstrate, however, that the cost of borrowing has become a more significant part of the fiscal calculation.This distinction matters. A country can retain strong institutions, deep capital markets and a globally important currency while still facing increasing pressure from debt-service costs. Reserve managers are not expected to make dramatic political judgements; they are expected to examine how changing economic conditions affect the security, liquidity and value of national assets.There is also a more mechanical effect. When market yields rise, the prices of existing fixed-income securities generally fall. Central banks holding government bonds purchased at lower yields may therefore face valuation losses, even if those securities remain highly liquid and are ultimately repaid.This encourages a familiar discussion within reserve-management institutions: what is the appropriate balance between return, liquidity and risk? Gold offers no regular yield, but it does not depend on the repayment of a particular government. Its appeal can therefore increase when reserve managers place greater emphasis on diversification and protection against systemic uncertainty.That does not mean gold should automatically replace government securities. Treasuries continue to serve functions that gold cannot fully replicate, including collateral use, liquidity management and monetary operations. The issue is not substitution but portfolio balance.The Question of LocationThe third dimension of the debate is legal rather than financial. It concerns the jurisdiction in which an asset is held and the circumstances under which access to it could be restricted.The immobilisation of approximately $300 billion in Russian central-bank reserves following the invasion of Ukraine made this issue particularly visible. Afghanistan’s frozen reserves had already demonstrated that sovereign assets held abroad could become subject to legal and political decisions taken by other governments.Such measures are adopted by states under their own legal and policy frameworks, and their justification remains a matter of international debate. From a reserve-management perspective, however, the narrower lesson is straightforward: custody involves jurisdiction. An asset held abroad is subject to the legal environment of the country where it is stored or administered.This does not mean that overseas custody is inherently unsafe, nor that every country faces the same level of exposure. Legal agreements, diplomatic relations, institutional protections and the nature of the asset all matter. Yet the experience of recent years has ensured that jurisdictional risk is no longer merely a theoretical concern.The recent decision by the Dutch central bank offers a useful example of how such considerations can operate without producing a wholesale withdrawal from established financial centres. Between March and August 2026, approximately 86 tonnes of gold were moved from holdings in the United States and Canada to London. The Dutch central bank said the move was intended to improve the tradability of its reserves and strengthen crisis preparedness. It explained that gold held in London could be mobilised more quickly in an emergency.Importantly, the decision was not simply a relocation away from North America. The Dutch central bank sold approximately 59 tonnes held in New York and purchased gold in London that met international market standards. More than 27 tonnes were physically transferred from the United States and Canada to the Netherlands, while a similar quantity was moved from the Netherlands to London.The details matter because they challenge simplistic interpretations. The objective was not necessarily to reject American or Canadian institutions. It was to improve the practical usability of reserves during a crisis.London and New York continue to offer considerable advantages, including market depth, established legal systems, clearing infrastructure and extensive experience in precious-metals trading. These strengths explain why most central banks have not fundamentally changed their existing custody arrangements.What is changing is the assessment of risk at the margins.How Much Weight Does Custody Risk Deserve?It would be easy to exaggerate the importance of custody risk. It is not the principal factor determining the daily gold price. Real interest rates, inflation expectations, currency movements, central-bank purchases and geopolitical developments explain considerably more of the market’s performance.Many analysts continue to regard real yields as a central influence on gold pricing and consider the recent divergence from historical patterns potentially temporary. That position should not be dismissed. Gold remains a financial asset whose price responds to changing expectations, and one unusual period does not necessarily establish a permanent structural shift.The more defensible argument is narrower. If investors and central banks increasingly value gold as protection against credit, currency and geopolitical risks—not only as an inflation hedge—then the location of that gold becomes relevant to its overall usefulness.Custody diversification is also not a hostile or unprecedented act. Central banks have long distributed reserves across currencies, asset classes and locations. Some may prefer domestic storage for reasons of control and national confidence. Others may favour established international centres because they provide greater liquidity and easier access to trading and lending markets.Neither approach is universally suitable. Domestic storage requires secure infrastructure, insurance, professional expertise and institutional capacity. Overseas storage can provide market access and operational efficiency, while also introducing jurisdictional considerations.The appropriate questions are therefore practical rather than ideological. Under whose law is each asset held? How quickly could it be converted into usable liquidity? What contractual and operational protections exist? When were these arrangements last reviewed?These questions do not amount to a verdict on any particular country or financial centre. They reflect a normal response to changing international conditions.Gold’s recent performance does not prove that interest rates have lost their importance. Nor does the review of custody arrangements demonstrate a mass movement away from established markets. It does suggest, however, that reserve managers are widening the framework through which they evaluate security.When the conditions for holding an asset change, reassessing how it is stored is not an act of distrust. It is one of the most routine responsibilities of prudent reserve management.Author: Qaiser Nawab is Chairman of the Belt and Road Initiative for Sustainable Development (BRISD), an international platform fostering cooperation and innovation across Asia, Africa, and Latin America. He can be reached at qaisernawab098@gmail.com
The New Arithmetic of Gold By Qaiser Nawab
