Dollar Swap Lines Are Now A Political Tool - Gold & Silver Markets Are Responding

Added: 2026-06-03

[00:00:00]Gold has just overtaken US treasuries as the world's top reserve asset. Gold now accounts for 27% of global central bank reserves compared with 22% of US treasuries. They hold more than 36,000 tons of gold between them, the highest level since the Bretonwoods era. You need to understand why central banks are making this move because it isn't because they've suddenly just fallen in love with gold. It's because trust in the dollar system is eroding. Since Russia's reserves were frozen in 2022, central banks have had to keep asking themselves the same question. If dollar assets can be weaponized, if they can be politicized or made conditional, are they still neutral reserves? In this excerpt from our very recent webinar, Steven Flood and Dave Russell explain why this shift marks a very structural break, why central banks are moving towards physical gold, and why those 36,000 tons are only just a part of the story that you are hearing about.

[00:01:02]I think we would all agree here that what this is showing is that the central banks are diversifying into a trusted asset. They're making a declaration about, you know, what they do and don't trust. So to put this into perspective, in total official gold reserves, I get that we can question a lot of the data coming out of China, but official gold reserves, total gold reserves are now 36,000 tons held by central banks around the world. This now exceeds what was held at the height of the Breton Woods era. So what we So that that's just in terms of weight. Gold now represents around 27% of official central bank reserves and this is compared with around 22% of that of US treasuries. Now when we spoke in May um we I think we lightly touched on the fact that um the likes of Turkey and a couple of others had been net sellers around the start of the Gulf War. Um but this to me is a very this still indicates that there is a big trend amongst central banks to be owning physical gold I think. Um and I um and so whilst we might look at those stock market pictures the truth is in the pudding in terms of the people that are actually managing the monetary system currently still want to be expert you know they are price insensitive at the moment and they will continue to buy. M >> um yeah >> yeah well we don't know if if we go back uh you know what are we talking about here uh four years ago you know when uh Russia invaded Ukraine uh and the challenges around holding dollar assets as they were effectively weaponized Russia now for you know if you just look at it purely financially owns none all right uh China's haved what they have owned in uh US treasuries over the last I think it's 10 10 12 years something like not uh the sovereign debt crisis that is creeping around the globe means that uh effectively sovereign nations are selling down their US debt. Uh this is a this is this is a trend that has been happening over the last decade to a greater or lesser degree. It is it is problematic. Uh and effectively where do you go if you do if you want to avoid US dollars? What's the alternative? Well, other currencies really aren't uh providing much of an alternative because we're living in a world here where trust is on the decline. Trust in the ability for governments to actually repay their debt. That means you invest in it, they can't pay you back the interest, but they can't pay you back the interest of the principal or your belief that they can is on the decline. So, you want the sh and this is this is no different on a sovereign level as it is on a personal level. people are looking for the shortest distance between them and their wealth, not for all of it, but for a portion of it. Uh, and this is an interesting point that we should go revisit when we talk about the the the paper versus the physical. It's the shortest difference between distance between you and your wealth. Uh, and central banks understand that's physical gold sitting in a vault. Um and they as a result of that we've moved over the last two decades into a world where there is decreased trust in effectively sovereign counterparties. So the natural thing is an increase in the percentage of gold that they hold on their balance sheets. I think that that doesn't go down for from here for a long time and it will only eventually go down when trust if it ever does return returns to those uh those counterparty trades. Um but I think we're going to slowly and steadily see an increase on that. Uh and that's without any talk about goldbacked um currencies, goldbacked exchanges, whatever. Without those, I still believe that what we are seeing is a movement away from dollar denominated assets, a movement away from fiat currencies, uh, and a large continued large allocation to gold for just that reason. Shortest distance between you and your wealth, physical gold sitting in a vault. Um I know Stephen you probably want to come in there but I just want to just say we had a number of questions about um dd dollararization um central uh bank digital currencies goldback currencies as well and I think just to highlight the point you've just made there is without talk of all of that happening without kind of you know formal steps being taken in each of those directions the the trend is that central banks just want more exposure to physical gold at the moment we haven't required a policy announcement or a change of stance in terms of how we're managing their own currencies and how they're trading. This has just been a natural move it seems.

[00:05:54]>> Yeah, I think it's just it's always it's always a case of watch what they do, not what what they not what they say because uh effectively if they come out and say that that is the way that they are going to continue to manage themselves going forward. It actually says more than just that. It is another ringing of the death nail for the US dollar.

[00:06:15]>> It's not a pro gold. It's not it's a not dollar story. Um because the dollar is weaponized as Dave said there four years ago. Um it it's not a Republican Democrat story either. The foreign central banks don't care. They just want to they want they want to make sure there's a steady hand in the states.

[00:06:30]They want they want to ensure that there's good institutions. They want to make sure that there's a rule of law that there's proper policy formulation that the system is not gamed and rigged.

[00:06:40]And uh I know probably some people, you know, gave out to us last time because they thought we were like beating up on the on Trump or the the Americans and whatnot. Honestly, I I don't think these these countries they they care who's in power. Uh they're very much they're very similar in terms of their policy. They might sound different. Uh but at the end of the day, it's uh what we're seeing is the dollar as the the biggest story since World War II losing its luster. Uh its institutions being eroded. uh because there's essentially a civil war in America right now and it's acting out it's playing out in across institutions and power bases. Uh the the uh the biggest victim uh and the collateral damage is the dollar. Uh these guys are too rich on their equities on their stock market their their property portfolios to realize what's happening.

[00:07:31]Um and and people are ddollarizing everywhere. So gold is that alternative.

[00:07:36]Uh and it's going to remain that way until there's a sea change in policy, there's a re-engagement with the international order, uh there's a respect for all the work that went on beforehand. And that might not be popular, but you know, that's the way the they're the rules, them the rules, as Boris Johnson would say. Uh and and uh and I think the the Americans have lost lost track of that, which is which is which is terrible because I don't really want any other currency to be the reserve currency. I like the idea of having an American policeman who will allow uh me as a European to go to court in New York and have my rights protected and have my uh my trade um you know stable in a currency that I can trust with an instit banking institution that works uh or banking system and to be honest people are losing faith in that.

[00:08:26]One major story I came across recently and I and I it's happened for a while but it didn't penny didn't drop for me until someone just outlined it and that is typically in crisis central banks uh will lend uh swap lines to other central banks in the world where they're going to say you know what we trade we're friends you've got a problem I'm going to give you a loan of dollars you're going to pay them back in four years five years time and you can stabilize your problem and put fire out and typically that was always done by you know technocrats u for economic uh and geostrategic reasons but recently and it's quite a departure as far as I know the the um the the department of the treasury is now issuing swap lines to uh political allies in certain parts of the world. Um and not only that but they're making them conditional on certain local political outcomes. uh and the biggest case is in Argentina with MLE they were able to issue a major swap line and it didn't come from the Fed which would be the norm it came from the department of treasury which was a quite a departure and the context of it was a total departure and if that doesn't tell you what the dollar is to the people in charge nothing will um and that's a signal to everybody else who holds dollars the system has now changed uh I can only get ahead if I participate at a political level and never mind the economic arguments and and to me that is just another nail in the coffin just like the you know taking Russia's assets no matter how you feel about that that conflict uh it was a major departure as well uh and I think and I think you know these are these are own goals these are man-made problems this is not due to some you know environmental catastrophe but my god the the integrated nature of the global economy means that if you start messing with the plumbing uh some real human level consequences come from that whether it be famine, disengagement, war, conflict, uh extreme political movements, uh this this stuff starts and it doesn't doesn't stop and the people who start it don't realize that they don't have the power to put it out.

[00:10:40]>> Yeah. I mean that the the the if you think about the financial system and how it how it works the global financial system effectively the uh the dollar is a reserve currency that's that system is the blood circulation system um and you know the treasury bonds that flow through that are effectively the blood but the swap lines um are is the blood transfusion so when it's needed you expect that it is there if they start as you could imagine in a in a hospital if they start deciding who's getting it. Uh and you're only getting it if you if you tick certain boxes that has as you say Steve has some real world implications.

[00:11:21]Um and the output the the outcome for that could be extremely extremely negative. I remember sitting on a trading desk back in um just after just after 9/11 and it was these international swap lines that basically kept the financial system from totally collapsing and not being able to be restarted. So they're like, "We don't realize all of these things." And you say, "They're managed by technocrats historically, but we don't realize the safeguards that the technocrats put in place because we don't see it as an average investor and they're behind the scenes." But these are some really important structural um structural things that keep the system from collapsing when it is uh under extreme pressure. That's a that's a really dangerous development in financial markets.