Gold rising, dollar wavering: inside the new economic ‘Cold War’ and its impact on Pakistan

Gold is nearing USD 4,500 an ounce as the dollar continues its volatile pattern of sliding and recovering throughout 2026. While daily market fluctuations are evident, a subtler competition persists between a still-dominant dollar system.

Which shows signs of strain, and China’s steady approach with gold bars and payment channels rather than public headlines. Pakistan can’t act as a referee in this conflict, but it also cannot afford to ignore it anymore.

There was a time not long ago when the dollar’s dominance seemed as inevitable. That certainty has diminished.

Over the past 18 months, the US Dollar Index (DXY), which compares the dollar to six major currencies, has experienced one of its most volatile periods in decades. It rose above 109 in January 2025, then fell sharply by 11 percent in the first half of that year, the steepest six-month decline since 1973. After a brief rebound, it has hovered near 99 today, still roughly 2.4 percent below where it was a month ago.

Meanwhile, gold has told a very different story: after starting 2026 close to USD 4,000 an ounce, it reached as high as USD 4,557 this week, more than USD 1,100 higher than a year ago.

Three numbers capture where things stand.

Much of the dollar’s volatility stems from policy shifts in Washington. Tariff shocks that unsettled trade partners, a record-breaking debt exceeding USD 38 trillion. And a contentious leadership change at the Federal Reserve. Kevin Warsh assumed the Fed Chair role in May 2026, vowing to enforce stricter inflation controls.

Since then, the Fed has maintained its policy rate in the 3.50–3.75 percent range across multiple meetings. Despite nine of nineteen policymakers indicating the possibility of a rate increase later this year, the committee has been most divided since 1992. A pause would likely bolster the dollar and support gold, whereas a rate hike might weaken them.

Overall, the era of an autopilot Fed is gone, and currency markets now react to every economic data release. While the dollar has zigzagged, gold has climbed almost in a straight line. The buying has been led less by nervous retail investors than by central banks.

The World Gold Council recorded net central-bank purchases of 288.9 tonnes in the second quarter of 2026 alone, a 62 percent jump from a year earlier and the strongest second quarter on record.

Remarkably placed in the very quarter when gold’s price briefly fell. Poland, China, Uzbekistan, Kazakhstan, and the Czech Republic were among the largest buyers. This is not casual portfolio diversification; it is a hedge against a dollar-based financial system.

Since Russia’s reserves were frozen in 2022, it no longer feels unconditionally safe to hold. Gold cannot be sanctioned. That single fact now shapes reserve-management decisions in dozens of finance ministries.

Beijing has been the most disciplined participant in this transition. However, the widespread perception that China is “winning” and preparing to supplant the dollar overstates the reality.

The People’s Bank of China has increased its gold reserves for over sixteen consecutive months, now reaching approximately 74 million troy ounces, valued at nearly USD 390 billion. China’s foreign exchange reserves have exceeded USD 3.4 trillion, a level not observed in nearly a decade.

Additionally, Beijing has developed infrastructure for a potential independent dollar system, including the CIPS cross-border payment system, the mBridge digital currency platform, and a vault at the Shanghai Gold Exchange in Hong Kong, aimed at enabling friendly central banks to store gold outside Western custody.

As of early 2026, the yuan’s share of global reserves was merely 1.99 percent, compared with the dollar’s 57.13 percent, largely because China’s capital controls limit the renminbi’s international use. China is not attempting to replace the dollar but rather constructing an insurance policy, subtly encouraging other nations to hold gold alongside it.

None of this is occurring within the context of open economic warfare. Washington and Beijing have maintained a fragile ‘tactical truce’ through 2026, characterized by mutual circumspection.

Tariffs have been reduced to approximately 30 percent on Chinese goods and 10 percent on American goods following the Trump-Xi summit in Beijing.

Additionally, there has been a one-year suspension of new export controls on rare earth elements and a 12.5 percent tariff increase, implemented in July pursuant to Section 301, driven by disputes over labour standards. Both nations possess strong incentives to prevent a complete rupture, given that American consumers continue to rely on Chinese manufacturing. While China requires access to export markets and dollar liquidity.

However, this so-called “managed friction” does not constitute stability. Each renewal deadline presents a potential cliff edge. And both capitals are leveraging this period of calm to enhance their long-term strategic positions.

Washington through tariffs and reshoring initiatives, and Beijing through gold reserves, payment infrastructure, and expanded trade relationships with the Global South.

Pakistan is not a bystander to this contest. It sits squarely in its path, and there is real opportunity in that position if the response is deliberate rather than reactive.

First, treat gold price swings as a macro signal, not just a jeweller’s story. With bullion near record highs, the State Bank should continue steadily building its own gold reserves, currently a modest 70-plus tonnes, as a genuine hedge, the same logic driving central banks from Warsaw to Astana, rather than letting reserve composition drift by default.

Second, safeguard and build upon the ongoing reserve recovery. SBP reserves reached about USD 18.4 billion by the end of FY26, boosted by a record USD 41 billion in remittances, with an estimated USD 44 billion expected in FY27. This growth is genuine, but it remains susceptible to external volatility.

Fluctuations in the global dollar and gold markets influence Pakistan’s import expenses and debt repayments, regardless of domestic policies. To reduce this vulnerability, the country should consider adopting longer-term, multi-currency financing strategies rather than relying solely on dollar-denominated debt.

Third, use the China relationship deliberately rather than symbolically. Pakistan has already settled a portion of its bilateral trade and CPEC-related financing in yuan, using swap lines with the PBOC.

Expanding yuan- and gold-backed settlement options for trade with China, without abandoning the IMF-anchored reform path that has stabilized the rupee near 277–278 to the dollar, gives Islamabad a genuine hedge rather than a geopolitical bet.

Most importantly, consider the limitations of a currency-only strategy. The private-sector credit-to-GDP ratio in Pakistan remains among the lowest in South Asia. No prudent reserve management can substitute for the necessity of an economy that fosters exports, reduces dependence on external borrowing, and allocates more of its deposits to local enterprises. The competition among the dollar, gold, and yuan creates a landscape that Pakistan can navigate either effectively or ineffectively. Nonetheless, ultimate success in 2030 hinges on whether Pakistani factories, farms, and businesses generate more than they did in 2026.

The old order isn’t ending. The dollar still dominates global trade. And no major institution treats its reserves as if that will change soon. However, shifts are happening, visibly with gold prices and quietly in the reserves of central banks from Warsaw to Beijing.

Pakistan’s goal isn’t to choose a side in a superpower rivalry beyond its control. But to build sufficient reserves, exports, and financial flexibility. This way, whichever direction the dollar-gold balance moves, Pakistan won’t be the one left stuck with the consequences.

Copyright Business Recorder, 2026