TOKYO – Bring out the jokes about “SAFE” – the acronym for the division of the People’s Bank of China entrusted with managing Beijing’s reserves.
The folks at the PBOC’s State Administration of Foreign Exchange are likely to have a restless July. Last month marked the 20th consecutive month that the PBOC increased its reserves. The purchase of 15 tons in June was the largest purchase of 2026.
Gold’s 20% drop since then was not in the cards for Governor Pan Gongsheng’s team. China’s problem isn’t alone either: Japan and India have also been hoarding gold, making it a predicament across Asia. This raises two questions as gold trades around US$4,000 per ounce.
First, why is gold falling when most expected it to continue rising toward $5,500 or $6,000 an ounce? Instead, she came out on top just over $5,600 in January and has fallen roughly 27% since then.
Second, what will central banks do now? Will the PBOC, Reserve Bank of India and others buy or sell gold to protect government assets?
Much of gold’s slide defies logic, not least a stubbornly persistent US dollar. By rights, the dollar should lose ground to gold this year: the US national debt is close to $40 trillion, inflation is running 3.5%-4% year-over-year, and Trump’s tariffs and military adventurism are driving friends and foes apart.
This background made gold’s January rally seem rational to many. And it seemed to lift the yuan to capture more of the global market share. Instead the opposite happened.
The Iran war is at the center of this story. The conflict that started on February 28 has been positive for the dollar, confusing the bears. Rising oil prices pushed US inflation expectations higher, hardening it Federal Reserve Resistance to lower rates.
This changed the expected scenario of 2026: instead of rushing to gold as a safe haven, investors relied on the dynamics of petrodollars. Energy-related worries boosted the currency by which oil prices, not the metal that normally feeds on fear.
Also, the typical oil-gold dynamic is not working this time. Oil and gold normally move together during geopolitical shocks as investors hedge against inflation and market turmoil. The Iran conflict reversed that, benefiting the dollar.
Kevin Warsh’s arrival at the Fed last month accelerated the dollar’s momentum – and unexpectedly. Warsh has so far not appeared to be the aggressive dove Trump hoped for when he nominated him for the presidency.
With inflation still hot and traders betting the Fed is more likely to hike than cut, real yields remain high — a drag on a non-interest-paying asset. Heavy-weighted exchange-traded fund (ETF) outflows piled up as investors turned to tech stocks, buying declines and gold lost its luster just as it lost its offering of safety.
To be sure, the structural case for gold is not gone. US debt continues to rise, central banks still want to diversify away from treasuries and the risk of sanctions linked to Russia’s frozen reserves in 2022 continues to worry global investors.
The question now is if PBOCThe RBI, the Bank of Japan and other top monetary authorities – having bought a surge that is now softening faster than expected – treat this pullback as a buying opportunity in line with their long-term logic of de-dollarization, or as reason to change course.
Count the officials in Warsaw stationed in the buying camp. The National Bank of Poland, the world’s largest holder of gold, has added 82 tons in its reserves so far this year.
“We have been buying gold consistently, taking advantage of the recent price drop,” Gov. Adam Glapinski told reporters last week.
He added that “this is not some kind of competition or a purchase made just for the sake of it. There is a deep understanding of the state’s role in guaranteeing the security of Poland and the Poles under all circumstances, including wartime, which of course we do not expect.”
Bob Haberkorn, senior market strategist at Stone X Group, noted that “there’s a bargain hunt here” after the recent decline, adding that “in the short term, the main driver for gold is the Fed.”
Carsten Minke, head of next-generation research at Julius Baer, agrees: “All the gold and silver markets care about now is whether the Federal Reserve will raise interest rates or not. We don’t expect the Federal Reserve to raise interest rates, as some of the inflationary pressure is likely to be temporary.”
Wednesday’s US inflation data may have further clouded the Fed’s outlook. Consumer prices rose a less-than-expected 3.5% year-on-year in June, down from 4.2% in May – the first annual rate decline since January.
The more lenient reading “gives Fed breathing room in deciding whether and when to raise interest rates,” said Nationwide Chief Economist Kathy Bostjancic.
For Moody’s Analytics chief economist Mark Zandi, the report “suggests that the worst is over, we are past the peak and inflation should moderate” from here. As Zandi noted, “the biggest threat is that things unravel and we’re back to full-scale war with the Strait of Hormuz closed.”
Meanwhile, Goldman Sachs Research worries that “a serious re-escalation of the conflict would threaten to revive the main risk of rising inflation and increase the chances of a rate hike.”
Testifying before Congress this week, Warsh cautioned against premature celebration. “There may be some who look at this morning’s data and say, ‘Oh, mission accomplished! It’s all blown.’ That is not my point of view.”
Despite talk of him being a Trump/MAGA Fed chair, he emphasized that the Fed has had “no tolerance” for the risk of a spike in inflation in years. “If we get the policy right – and I can assure you we will – the rise in inflation of the last five years will be a thing of the past,” he said.
Saxo Bank strategist Ole Hansen doubts the Fed will hike at all this year, which could support gold in the coming months. “We maintain the position that the relief inflationary pressures In the coming months it could begin to change the rate hike narrative,” he said. “Warsh wants to assert his credentials by not upsetting Trump too much.”
Nick Twidale, chief market analyst at AT Global Markets, warned that confusion over oil traffic through the Strait of Hormuz could make for a “volatile” week – one that “could test the glass-half-full mentality we’ve seen recently”.
However, this is not the time for Treasury Secretary Scott Bessent’s team to be cocky about the dollar’s strength. The forces behind gold’s rally haven’t gone away — including fears that Trump’s fiscal plans ahead of November’s congressional elections could unnerve the bond market.
The fiscal consequences of “A nice big bill“, passed by Trump Republicans in July 2025, accelerated Washington’s debt explosion. The Committee for a Responsible Federal Budget calls it the most expensive reconciliation bill in US history, predicting it will add $4.1 trillion to the national debt by 2034 — rising to $5.5 trillion if the temporary provisions become permanent.
This, combined with Trump’s tariff obsessions and military interventions from Venezuela to Iran — and possibly Cuba next — has governments like China rethinking their reliance on the dollar. So is Trump’s push to curb the Fed’s independence, which could significantly raise yields on government debt. If Warsh doesn’t steer the Fed toward a rate hike soon, Trump may revert to his hand-picked successor Jerome Powell.
The broader BRICS bloc – Brazil, Russia, India, China, South Africa – has not been shy about bypassing the dollar, and the push for an alternative could be in overdrive as Washington ramps up pressure on Brazil on uniquely personal terms.
In 2025, Trump linked the 50% tariff he imposed on President Luiz Inácio Lula da Silva’s economy to what he calls Brazil’s “.witch huntagainst former President Jair Bolsonaro, a Trump ally prosecuted for his role in trying to subvert the 2022 election.
BRICS members read it as another example of Washington weaponizing its financial dominance — on top of tariffs and threats to penalize any country that flirts with dollar alternatives.
Of course, the dollar will not collapse overnight, nor is the yuan ready to take on the full burden of a global reserve currency. Ten years after Xi took the internationalization of the yuan seriously, China’s currency accounts for just 2% of foreign exchange reserves compared to 57% for the dollar and approximately 20% for the euro.
Paradoxically, however, the more turmoil Trump starts, the more global investors seem to favor the dollar – at least for now. Suffice it to say, though, that 2026 isn’t working out the way the gold bulls expected.
Follow William Pesek on X at @WilliamPesek
