Alternative approaches to investing in gold

DAR ES SALAAM: FOLLOWING a food-for thought discussion that bullion gold bars alone are not a reliable way to create currencies, serialised gold bars were published a few weeks ago in the Daily News, dated August 4, 2026, pg 15.

Today’s point of view will explore in depth how gold functions as a strategic reserve investment within central banks. Many people, even those not fully aware, should note that gold has once again become central to central-bank reserve strategies.

What was once seen by some policymakers as an outdated monetary asset is now increasingly viewed as a strategic tool for diversification, safeguarding against geopolitical risks, and maintaining long-term purchasing power. The renewed interest is notable.

The World Gold Council’s 2026 Central Bank Gold Reserves Survey indicates that central banks have been purchasing approximately 1,000 tonnes of gold annually over the past four years, which is double the previous decade’s average of about 500 tonnes per year, equivalent to a share of total reserves in five years.

The main policy concern isn’t merely whether central banks should hold gold but how they should distribute their investments.

Different strategies are available from an investment perspective, each impacting liquidity, returns, monetary policy, risk, governance and economic growth differently.

The most common method known is for a central bank to buy internationally recognised physical, tradable, and serialised gold bars and keep them as part of its official reserves.

This is likely the most straightforward form of gold investment because the central bank directly owns the physical asset without depending on another institution’s creditworthiness.

For example, the National Bank of Poland has adopted a vigorous accumulation approach. By the end of 2025, it increased its holdings by 102 tonnes, reaching a total of 550 tonnes, which is about 28 per cent of total reserves.

The bank later adjusted its target allocation upward from 20 per cent to 30 per cent. Central banks are naturally drawn to physical gold because it does not carry issuer or sovereign credit risk.

Unlike a US Treasury security, which exposes the holder to the creditworthiness and interest-rate fluctuations of the issuer, gold’s value does not depend on any government making payments.

This approach, however, comes with costs. Gold does not produce coupon or interest income. It incurs expenses for storage, insurance, transportation, verification and security.

Additionally, gold prices are often quite volatile. The IMF’s 2026 analysis warns that gold should be considered a relatively high-risk reserve asset, not a substitute for highly liquid assets needed for immediate external payments.

A second method is strategic averaging. In this approach, rather than trying to forecast the gold price, a central bank sets a long-term allocation goal and buys gold at regular intervals.

This method is especially suitable when gold prices are high. Making large purchases during a market peak can lead a central bank to significant mark-to-market losses if prices later fall. The 2025 experience highlights the issue.

While central-bank demand stayed robust, purchase rates moderated somewhat as gold prices hit consecutive record highs.

Overall, central-bank purchases totalled around 863 tonnes, less than the over 1,000 tonnes seen in each of the past three years. A central bank might implement a five-year plan to allocate a fixed percentage of reserve inflows to gold.

This approach helps prevent the risk associated with concentrating purchases at a single price point.

The key idea is that gold accumulation should be based on strategic asset allocation rather than speculation on future gold prices, even if an opportunity to buy and sell is there.

For countries that produce gold, a more impactful approach involves incorporating domestic gold production into official reserves.

Instead of exporting all gold and purchasing foreign gold with foreign currency, central banks can establish a transparent system to buy a portion of locally mined gold, refine it, serialize the bars to international standards, and include them in their official reserves.

From an investment perspective, this model offers multiple potential benefits. It can enhance reserves, promote the formalisation of artisanal and small-scale mining, improve traceability, curb illicit gold trading and help retain more economic value within the country.

However, this remains one of the most sensitive methods. The IMF cautions that domestic gold-purchase programmes may pose risks related to governance, financial integrity, operations, balance sheets and monetary policy if not properly structured.

Therefore, a central bank should avoid acting as just another gold buyer competing with private traders.

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Instead, a strong framework would include transparent pricing, independent assaying, anti money-laundering measures, competitive procurement processes, clear eligibility criteria and a clear separation between the central bank’s monetary role and commercial mining operations.

For many gold-producing countries, this strategy could be especially impactful by linking gold production, formal market participation, reserve building, financial inclusion and export revenues within a single policy framework.

Another strategy is to enhance gold reserves by engaging in gold swaps, deposits, or lending with highly creditworthy partners.

In a gold swap, a central bank temporarily exchanges gold for foreign currency, with an agreement to reverse the transaction later. Gold lending can also generate returns on what would otherwise be a non-yielding asset.

The appeal of this approach is that the central bank can earn income while retaining an economic claim on its gold.

Yet, it also brings counterparty and liquidity risks. Gold stored physically in a vault is simpler to monitor and control. Once the gold is lent, swapped, or otherwise encumbered, the central bank becomes vulnerable to the counterparty’s financial health and contractual commitments.

Therefore, gold lending is typically better suited to an active reserve-management portfolio rather than being part of the core strategic holdings. An alternative approach is to treat gold as a strategic asset within reserve management, rather than just a transactional element.

The World Gold Council’s 2026 survey found that 76 per cent of central banks manage gold separately from other reserves, with 75 per cent highlighting gold’s strategic importance as a key factor. For those unfamiliar, the primary physical form of gold is the London Good Delivery bar.

This distinction is crucial because gold does not act like traditional fixed-income assets. Its main role might be diversification and preserving value rather than providing short term liquidity or earning interest.

A forward-looking central bank might organise its reserves into three key layers: a liquidity portfolio with highly liquid foreign currency assets for intervention and external obligations; an investment portfolio focused on income generation within acceptable risk limits and a strategic portfolio holding gold and possibly other assets mainly for diversification, crisis resilience, and long-term value preservation.

This setup clarifies that gold is not expected to perform the same function as Treasury bills or cash. Central banks need to determine where to store gold.

Historically, key international financial hubs have been preferred due to their liquidity and convenient trading and settlement options. However, geopolitical shifts have led central banks to rethink custody strategies.

The 2026 World Gold Council survey indicates a growing movement toward diversifying storage sites.

A practical approach is a dual-custody strategy: Holding part of the reserve in a major international financial centre to ensure broad market access, while keeping another portion domestically for strategic sovereignty and confidence.

In a developing economy, domestic storage can also boost public trust in national reserves, as long as security, auditability and adherence to international bullion standards are upheld.

A more innovative strategy involves central banks engaging indirectly in gold investments via highly liquid gold-linked tools.

For instance, gold-backed exchange-traded funds offer gold exposure without the need for physical bar management.

Nevertheless, this method is better suited for institutions aiming for tactical exposure rather than for central banks establishing a core reserve. The main benefit is liquidity and ease of operation.

However, a drawback is that the central bank takes on extra layers of intermediary, custody and market risk. As a result, gold backed securities should generally serve as a complement to physical monetary gold, not a substitute.

Strategically, the most effective policy may not be to view gold as a substitute for the US dollar but as a supplementary reserve asset to diversify holdings.

This distinction is important because substituting one concentration for another does not enhance true resilience.

A central bank should consider gold alongside key reserve currencies, high-quality sovereign bonds, deposits, and other liquid assets.

The World Gold Council’s 2026 Central Bank Gold Reserves Survey highlights why this issue is increasingly important.

An assessment of the survey’s data indicates that 84 per cent believe gold will make up a larger share of reserves over the next five years.

However, the data also show that diversification has its limits. Excessive gold holdings by a central bank could diminish the income and liquidity benefits of the entire portfolio.

The key policy takeaway regarding gold is straightforward. The main argument for holding gold is not that its price will keep increasing, as such an assumption would make central-bank reserve management speculative.

A more persuasive argument is that gold presents a different risk profile compared to traditional reserve assets.

It has no issuer, can improve diversification during financial or geopolitical crises, and aids in maintaining purchasing power over the long term. Central banks are increasingly highlighting crisis resilience, store of-value qualities and diversification advantages as main reasons for holding gold.

However, gold has certain limitations: It does not earn interest, its market value can decline unexpectedly, storage is costly, and it cannot substitute liquid foreign-currency reserves.

The IMF’s recent analysis emphasises that while gold can enhance long-term balance sheet resilience, its liquidity and hedging benefits rely on specific conditions rather than being assured. What central banks should do is left open for you to digest and decide.

A key piece of advice is that the optimal strategy is not simply to buy as much gold as possible or to avoid it due to the lack of interest payments.

Instead, it involves determining the appropriate amount, the best purchasing approach, the suitable custody structure and the proper risk limit. Crucially, gold should not be seen just as a commodity stored in a vault.

It should be regarded as a strategic asset within a balance sheet, a part of a diversified reserve framework designed to safeguard national financial stability, especially when traditional assumptions about currencies, interest rates and geopolitics are challenged.