According to a survey conducted by Invesco, an increasing number of countries are repatriating their gold reserves as a safeguard against the type of sanctions imposed by the West on Russia.
The study, which included central banks and sovereign wealth funds, revealed that geopolitical tensions and the freezing of Russia's gold and forex reserves by the West in response to the Ukraine invasion have prompted a shift in strategies.
Over 85% of the participating sovereign wealth funds and 57 central banks anticipate higher inflation in the coming decade compared to previous years. As a result, gold and emerging market bonds are viewed as favorable investments in this environment. Additionally, concerns over the precedent set by the freezing of Russia's reserves led to 60% of respondents finding gold more attractive, with 68% opting to keep reserves within their own countries as a safe haven asset.
Some central banks explicitly mentioned repatriating gold from foreign locations to hold it domestically for safety purposes. The sentiment of "If it's my gold, then I want it in my country" has become a prevalent view among central banks.
Geopolitical concerns and opportunities in emerging markets are also driving central banks to diversify away from the US dollar. Approximately 7% of respondents consider rising US debt as negative for the dollar. While the majority still see no alternative to the dollar as the world's reserve currency, the belief that China's yuan could challenge the dollar declined from 29% to 18% compared to last year.
The survey identified geopolitical tensions as the biggest risk over the next decade for nearly 80% of the institutions surveyed. Inflation was also a significant concern for 83% of respondents in the next 12 months. Infrastructure, particularly renewable energy projects, was viewed as the most attractive asset class.
India remained an attractive investment destination due to concerns surrounding China, and the trend of near-shoring boosted the appeal of countries like Mexico, Indonesia, and Brazil. Conversely, China, Britain, and Italy were seen as less attractive. Rising interest rates, coupled with the shift towards remote work and online shopping during the COVID-19 pandemic, made property the least attractive private asset class.
Invesco's report emphasized the importance of recognizing the risks associated with inflated asset prices and making substantial portfolio changes. As central banks and sovereign wealth funds grapple with higher inflation, a significant shift in investment strategies is expected. Photo by Stevebidmead, Wikimedia commons.