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Fool's Gold? How the USD lost its Shine

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Listed:
  • Kai Arvai
  • Nuno Coimbra
  • Marco Pinchetti

Abstract

This paper investigates the determinants of international investors’ portfolio choices between gold and sovereign bonds in an environment shaped by economic and geopolitical shocks. We develop an endogenous portfolio choice model where reserve safety has a political dimension — sovereign bonds issued by the dominant reserve country are more liquid but exposed to the issuer’s sanctions authority, while gold offers sanctions protection at the cost of lower liquidity. Our model implies that US convenience yields fall during periods of high sanction risk, as safe-asset demand fragments along geopolitical lines. Empirically, periods of elevated geopolitical risk coincide with higher gold prices and 10-year Treasury yields. In such periods, the average composition of official reserves shifts toward gold, with countries less aligned with the US increasing their holdings to a greater extent.

Suggested Citation

  • Kai Arvai & Nuno Coimbra & Marco Pinchetti, 2026. "Fool's Gold? How the USD lost its Shine," NBER Working Papers 35669, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:35669
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    JEL classification:

    • E41 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Demand for Money
    • F02 - International Economics - - General - - - International Economic Order and Integration
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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