Fool's Gold? How the USD lost its Shine

Kai Arvai, Nuno Coimbra and Marco Pinchetti

No 35669, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: E41 F02 F33 (search for similar items in EconPapers)
Date: 2026-08
Note: IFM
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Chapter: Fool’s Gold: How the USD Lost Its Shine (2026)
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