Gold, Sovereignty, and Smuggling

The sharp rise in gold prices over the past two years has transformed gold from a conservative reserve asset into a central pillar of monetary sovereignty and geopolitical risk management. With bullion prices climbing more than 60% and repeatedly setting new records above 4,300 dollars per troy ounce, gold has re-entered the strategic core of global finance. This rally, however, has also exposed structural weaknesses in the global gold supply chain, particularly in countries where gold is mined informally. As smuggling, environmental damage, and criminal activity expand alongside rising prices, central banks are increasingly stepping beyond their traditional role as reserve managers and entering the physical gold trade directly.

In many gold-producing developing economies, a significant share of output comes from artisanal and small-scale miners. These operations are often informal, lightly regulated, and deeply embedded in local survival economies. When prices were low, governments tolerated a degree of informality. At today’s price levels, however, the losses have become too large to ignore. In Madagascar, for example, annual gold production is estimated at up to 20 tonnes, worth roughly 2.8 billion dollars at current prices. Yet most of this gold leaves the country illegally, bypassing taxes, export controls, and foreign-exchange channels. On paper, gold barely appears in Madagascar’s export statistics, even though it is one of the country’s most valuable natural resources.

The surge in gold prices has dramatically amplified these distortions. Higher prices increase the incentive for smuggling networks, which are often better equipped than governments, using aircraft, helicopters, and cross-border logistics. Criminal groups, in turn, channel profits into other illicit activities, while environmental damage escalates. Mercury contamination, deforestation, and polluted rivers are now widespread in gold-producing regions. In Ghana, more than 60% of waterways are contaminated by artisanal gold mining, turning what was once a technical issue into a national political crisis. Similar dynamics are unfolding in Ecuador, where drug gangs have increasingly turned to illegal gold mining as a reliable source of cash.

Faced with these pressures, central banks and finance ministries are experimenting with a more interventionist approach. Rather than relying solely on regulation and enforcement, they are creating domestic gold-buying programmes that offer miners a legal, competitive alternative to smuggling. Under these schemes, central banks purchase gold directly from local producers at transparent prices and with rapid settlement. Ecuador’s central bank, which began such a programme in 2016 and is now expanding it, pays miners within 48 hours. Speed matters: when official buyers can match or beat the terms offered by smugglers, miners have a strong incentive to stay within formal channels.

This strategy is gaining traction across regions. Ghana established a centralised gold-buying body in 2025. Madagascar’s central bank is expanding its programme with the aim of both reducing trafficking and increasing its own official reserves from one tonne to four tonnes. Similar initiatives exist or are under consideration in countries ranging from the Philippines to Mongolia. According to estimates cited by the World Gold Council, artisanal and small-scale miners produce up to 1,000 tonnes of gold each year globally. Even if only part of this volume enters illicit supply chains, the sums involved are enormous, especially at today’s prices.

These domestic buying programmes also intersect with a much larger structural shift in global reserve management. Since 2022, central banks worldwide have accumulated more than 3,300 tonnes of gold, marking the strongest period of official sector buying since the collapse of the Bretton Woods system. Annual purchases have exceeded 1,000 tonnes for several consecutive years, more than double the average pace seen between 2010 and 2021. What makes this trend especially striking is that it has continued despite gold’s sharp price appreciation. Central banks are buying not because gold is cheap, but because it offers qualities that other reserve assets increasingly lack.

At the core of this shift is counterparty risk. Gold is a bearer asset. It carries no promise from another government, no exposure to a foreign payment system, and no dependence on political goodwill. Recent years have underscored how vulnerable traditional reserve assets can be. After Russia’s 2022 invasion of Ukraine, around 300 billion dollars in Russian central bank assets held abroad were frozen by Western governments. That episode sent a powerful signal to reserve managers worldwide: assets held within foreign jurisdictions can be immobilised or weaponised in times of political conflict.

The long-running dispute over Venezuela’s gold held at the Bank of England has reinforced the same lesson. Roughly 31 tonnes of Venezuelan gold, stored in London since the 1980s, have been frozen for years amid legal battles and diplomatic recognition disputes. While the case is highly specific, its implications are general. For many governments, especially those outside Western political alliances, it highlighted the risks of storing sovereign reserves abroad. Repatriation of gold, or the accumulation of domestically sourced bullion, is increasingly seen as a way to reduce exposure to such risks.

Domestic gold-buying programmes serve multiple objectives at once. They help formalise artisanal mining, improve environmental and labour standards, and capture tax revenues that would otherwise be lost. At the same time, they allow central banks to build reserves without relying entirely on international markets or foreign custodians. In some cases, purchased gold is refined abroad and sold to generate foreign currency; in others, it is added directly to reserves. Either way, the state regains control over a resource that had long operated beyond its reach.

The approach is not without challenges. Verifying the origin of gold remains difficult, especially in regions with weak governance. Civil society organisations warn that poorly designed buying programmes risk legitimising illegally mined or conflict-linked gold. Past failures in countries such as Sudan and Ethiopia demonstrate how central banks can inadvertently become buyers of illicit production if due-diligence systems are weak. In response, new technologies are being tested. Ecuador, for example, is piloting isotope-based scanners that can chemically fingerprint gold ore and help identify its origin. While still in early stages, such tools could significantly improve traceability over time.

There are also examples where long-term engagement has produced tangible benefits. Mongolia’s central bank has operated a domestic gold-buying programme for more than three decades. Over time, this helped push artisanal mining toward more formal structures and contributed to the near-elimination of mercury use, as buying stations could easily test for contamination. The programme also became an important source of foreign currency during periods of external stress.

Ultimately, central banks’ deeper involvement in the physical gold market reflects a convergence of economic, environmental, and geopolitical forces. Record prices have magnified the costs of informality and smuggling. At the same time, the freezing of sovereign assets and the growing fragmentation of the global financial system have reshaped how reserve managers think about safety and control. Gold now sits at the intersection of monetary policy, national security, and resource governance.

What is emerging is not simply a return to gold as a reserve asset, but a more activist model of state engagement with the gold economy itself. By buying gold at the source, central banks are attempting to choke off illicit flows, stabilise domestic sectors, and anchor national wealth more firmly within their own financial systems. In a world of rising geopolitical tension and declining trust in global rules, gold’s appeal lies not only in its price, but in its ability to exist outside the reach of others.