Gold serves as a hedge against financial system instability

The modern financial system relies on the assumption that institutions and infrastructure remain trustworthy and politically neutral. However, financial claims such as bank deposits, bonds, and reserve balances are liabilities or contractual claims that can be frozen, sanctioned, or made inaccessible if institutional behaviors change.

This distinction became evident in February 2022, when a coordinated effort by the United States, the EU, the UK, Canada, and Japan immobilized approximately $300 billion of the Russian central bank’s foreign exchange reserves. These assets were distributed across US dollars, euros, and sterling, with a significant concentration at Euroclear in Belgium. Additionally, several Russian banks were removed from the SWIFT system.

The only major Russian reserves that avoided these freezes were those held as renminbi in China or as physical gold in Russian vaults. This event has been noted for challenging the global financial system’s perceived stability and the illusion of institutional trust.