Trump's tariff policies drive central banks to increase gold holdings, reducing reliance on the US dollar. Emerging markets face higher gold allocations, while poorest countries suffer from high tariffs. Gold prices surge, and central banks play a key role in demand.
Central Banks to Increase Gold Holdings Amid Trump's Tariff Risks
Given the risks posed by President Donald Trump's tariff policies, central banks are expected to continue purchasing gold to further diversify their foreign exchange reserves and reduce their reliance on the US dollar.
According to the World Gold Council (WGC), central banks' gold purchases surged by 54% year-on-year in the last quarter of 2024, when Trump won the US presidential election, reaching 333 tons.
Emerging Markets' Gold Allocation
Currently, gold accounts for about 10% of the assets held by central banks in emerging markets. Michael Widmer, a commodity strategist at Bank of America, suggests that emerging market central banks should allocate 30% of their assets to gold, which would require an additional 11,000 tons of gold reserves. The uncertainty surrounding US economic policy is expected to persist for years to come.
From a central bank's perspective, this uncertainty translates into reduced willingness to include US Treasuries in their investment portfolios and increased motivation for de-dollarization.
Impact on the Poorest Countries
Trump's latest tariff measures are set to hit some of the world's poorest countries the hardest, jeopardizing their labor-intensive export industries.
For instance, Cambodia faces a 49% tariff rate, the highest in Asia, while Bangladesh is at 37%, Laos at 48%, and Lesotho at 50%.
"Look at Cambodia, 97%," Trump remarked at the White House, eliciting laughter when he mentioned the Southeast Asian country's tariffs on the US. "They’ve made a fortune off the United States." According to the World Bank, the average daily income in Cambodia is approximately $6.65, less than one-fifth of the global average.
This trade action could further harm the economies of these countries, especially as the US withdraws aid from some of the world's poorest nations. For example, Myanmar has already felt the impact of aid drying up.
"It’s really a disaster," said Deborah Elms, head of trade policy at the Hinrich Foundation. "Tariffs close to 50% overnight are unmanageable." She noted that many of these countries, previously exempt from tariffs as least-developed nations, may now turn to markets in Europe, Japan, and Australia.
Trump Policies Fuel Gold's Surge
Trump's policies have also been a significant driver of the gold rally, with central banks expected to continue buying gold this year to diversify reserves and reduce dollar dependency.
The Russian invasion of Ukraine in 2022 served as the first catalyst for central banks' gold purchases, which have since exceeded 1,000 metric tons annually, double the average of the past decade.
Spot gold hit a new record of $3,167.57 per troy ounce on Thursday, up 19% since early 2025 and 71% since late 2022.
Central Banks' Role in Gold Demand
Central banks are the third-largest source of gold demand after jewelry and investment, accounting for 23% of global gold consumption. Typically, they are price-sensitive, buying more when prices are low and reducing purchases when prices rise.
Analysts suggest that expectations of steady price increases mean central banks are unlikely to delay their purchases. However, they may choose not to disclose their buying activity, as Trump has threatened tariffs on countries seen as actively de-dollarizing.
Official data reported to the International Monetary Fund (IMF) reflects only 34% of the WGC's 2024 estimate of total central bank gold demand.
From January to February, central banks reported a net increase of 44 tons in gold reserves, with Poland and China being the largest buyers.
Swiss Watchmakers and Industrial Firms at Risk
Vontobel analysts noted that among Swiss exporters, luxury companies, watchmakers, and medium-sized industrial firms appear most vulnerable to Trump's planned 31% tariffs on imports from Switzerland.
However, Swiss pharmaceutical exports and some semiconductor products may receive tariff exemptions. Additionally, large companies with production facilities in the US could even benefit.
"Pure domestic Swiss market players are relatively safe havens," the analysts added.
UK's Lighter Tariff Burden
According to Panmure Liberum analysts Joachim Clement and Susannah Cruz, the UK has escaped relatively unscathed compared to other major economies, with a comprehensive tariff rate of 10%, lower than other nations. They noted that the UK could even avoid these lighter tariffs by making concessions in other areas.
They added that the drag on UK GDP growth would be minimal. "If the UK government can negotiate significant tariff reductions with the US, it could even become a preferred location for reconfiguring supply chains."
Japan's Economic Recession Risk
Economists warn that Trump's comprehensive tariffs have cast doubt on the Bank of Japan's (BOJ) policy normalization, given the risk of a domestic recession.
"This is beyond our worst-case scenario," said Shigeto Nagai, head of Oxford Economics in Japan and former head of the BOJ's international department. "The BOJ's rate hike path may be paused for some time."
Trump announced a 24% comprehensive tariff on Japan starting next week, with a 25% tariff on imported cars taking effect at midnight Thursday in Washington. Economists say these measures will deal a significant blow to the economy.
Nagai expects Japan's economy to enter a mild contraction in the third quarter, with weakness persisting for some time, potentially leading to two consecutive quarters of decline—the textbook definition of a recession. He added that while Japan continues to seek tariff exemptions, a quick resolution seems unlikely.
"Unless tariffs are reduced soon, the next rate hike could be postponed beyond September," wrote Takeshi Yamaguchi, chief Japan economist at Morgan Stanley MUFG Securities, in a note Thursday.
BOJ's Rate Hike Prospects
Before the tariff announcement, the focus had been on whether the BOJ might raise rates as early as its next policy meeting on May 1.
In an interview Wednesday, former BOJ policy board member Seiji Adachi, who ended his five-year term last week, said a rate hike in May was possible due to stronger inflation.
The BOJ has repeatedly stated that it would raise its benchmark rate from 0.5% if the economy continues to move toward its goals, including sustainably maintaining inflation around 2%. In a survey last month, most economists predicted a rate hike in June or July.
Overnight index swaps now show traders see less than a 50% chance of a rate hike by the end of September, down from around 92% earlier this week. For the next meeting, the implied probability of a rate hike has fallen to below 10%."