Azerbaijan’s golden buffer: SOFAZ builds up its reserves Analysis by Khazar Akhundov

Last year was marked by an unprecedented surge in gold prices, with the value of the “yellow metal” in dollar terms increasing by 70%, while its price reached an all-time high in January 2026. However, the market underwent a correction in March this year, facing strong volatility and falling prices. In August, gold prices began rising again, and last Monday, October futures on the New York COMEX exchange exceeded $4,700 per ounce.

This trend has been supported by investor activity, as well as demand from central banks and sovereign wealth funds. Taken together, these developments are having a positive impact on Azerbaijan’s position. According to estimates by international rating agency Fitch Ratings, rising gold prices and the volume of gold held in the reserves of the State Oil Fund of the Republic of Azerbaijan (SOFAZ) are strengthening the country’s financial buffer.

According to studies by the World Gold Council (WGC) and several major banking institutions, record global demand for gold in 2024–2025 was driven largely by heavy purchases by central banks and an unprecedented surge in demand from private investors. The rush to gold as a safe-haven asset in recent years has also been significantly fueled by the prolonged war in Ukraine and the escalating conflict in the Middle East.

As for the main economic factors influencing the precious metals market last year, experts pointed to a cycle of interest-rate cuts and monetary easing by the U.S. Federal Reserve, the European Central Bank and other major central banks and financial regulators.

As a rule, gold prices are inversely correlated with the U.S. dollar. Therefore, when monetary conditions ease, liquidity increases and Treasury yields decline, demand for the “yellow metal” tends to rise.

At the same time, the market was also influenced last year by the United States’ tough trade policy. Tariff pressure on China, India and the EU dampened global trade and production, putting pressure on financial markets. Debt levels continued to rise, currencies increasingly became instruments of geopolitical pressure, and market stability weakened. Against this backdrop, gold steadily regained its role as a fundamental and virtually irreplaceable safe-haven asset.

As gold’s role in portfolio risk management grew last year, investment demand surpassed jewellery demand for the first time, accounting for 43% of total demand, compared with 31% for jewellery.

Similar trends have also been observed this year, although the market dynamics have changed somewhat. After reaching an all-time high of $5,590 per troy ounce at the end of January, gold prices fell by nearly 20% in March amid heightened volatility. By the end of June, the metal was trading below $4,000 per ounce.

Overall, since the beginning of 2026, the dollar price of gold, based on the spot market, has fluctuated within a range of 3% to 7%, a relatively modest increase compared with last year’s unprecedented gains.

The market has been shaped by opposing trends. The World Gold Council recorded a decline in demand during the second quarter, largely due to weaker interest from the increasingly pressured jewellery sector. This year, the balance of influence in the global gold market has effectively shifted from jewellery consumers toward investors. At the same time, demand for gold from the technology and industrial sectors has also declined, accounting for less than 6% of total demand.

A new wave of demand emerged this August. On Monday, for example, the October gold futures contract on the COMEX exchange rose to nearly $4,714 per troy ounce. According to medium-term forecasts from major global banks, gold prices could eventually reach $5,500–$6,000 per ounce, as capital continues to flow into an asset with inherently limited supply.

This is hardly surprising. Rough estimates put the combined value of global financial assets at around $500 trillion, while the total value of the physical gold market — including bullion, coins and gold-backed exchange-traded funds (ETFs) — is estimated at only about $25 trillion.

Gold currently accounts for an average of just 1–2% of investment portfolios. Even if only 0.5% of global capital were shifted into gold, this would generate an additional $2.5 trillion in demand. While such a shift would be barely noticeable in global financial markets, it would represent almost a full year of gold sales worldwide.

At the same time, underground gold reserves are gradually being depleted, ore grades at mature mines are declining, and major new deposits are becoming increasingly rare. As a result, global gold production could fall by 15–20% from current levels by 2030.

Against this backdrop, central banks continued to increase the share of gold in their reserves in 2026 or, at the very least, showed no intention of reducing their holdings. For central banks, gold is no longer primarily a source of returns but a form of insurance against financial and geopolitical risks.

In Japan, for example, funds that had remained in zero-interest deposits for years began flowing into gold in 2025 amid a weak yen and elevated inflation, with inflows exceeding 120 tonnes. Poland added around 102 tonnes, raising gold’s share of its reserves to 28%, while setting a target of 700 tonnes. China has purchased gold for 18 consecutive months, while gold accounts for around 86% of Uzbekistan’s total reserves.

Similar developments have also taken place in Azerbaijan. By the end of last year, the State Oil Fund of Azerbaijan (SOFAZ) had acquired 53.4 tonnes of gold, bringing its total holdings to a record 200 tonnes. Despite a slight decline in gold holdings between January and April this year, gold now accounts for more than one-third of SOFAZ’s total assets.

It is worth recalling that SOFAZ began actively investing in gold about five years ago. Amid heightened risks to its investment portfolio stemming from volatility in global financial markets, the Fund increased gold’s share of its total assets from 13.1% to 13.9% in 2022. By early 2023, its gold holdings had reached approximately 101.8 tonnes.

In the years that followed, the Fund continued to steadily increase its gold holdings, using the asset as a hedge against risks associated with currency depreciation and declines in the value of securities.

As a result, Fitch Ratings recently released an assessment of the impact of Azerbaijan’s gold reserves on the country’s external financial position.

At the end of the first quarter of 2026, SOFAZ’s investment portfolio reached $73.5 billion, equivalent to around 93.2% of Azerbaijan’s projected annual GDP. Gold is the largest component of the State Oil Fund’s portfolio, accounting for 36% of its total assets. For comparison, at the end of 2025, gold accounted for 32.2% of Azerbaijan’s sovereign external assets, according to Fitch Ratings.

The agency’s analysts also noted that rising precious metal prices directly contributed to a $19.4 billion increase in SOFAZ’s assets between 2023 and the first quarter of 2026. At the same time, 26% of this growth was attributable to an increase in the Fund’s gold holdings.

In addition, between 2024 and June 2026, SOFAZ purchased a total of 76 tonnes of gold, making it one of the world’s largest institutional buyers of the metal, after the central banks of Poland (274 tonnes), China (111 tonnes) and India (77 tonnes).

Fitch Ratings believes that, unlike other countries in the region, gold accounts for an insignificant share of the Republic of Azerbaijan’s commodity exports. The country maintains its traditional current account surplus, which is not dependent on precious metals exports.

According to the agency, Azerbaijan holds its gold reserves entirely or predominantly domestically. Physical storage within the country reduces political and legal risks, compared with storage in foreign hubs, while the liquidity of Azerbaijani gold is assessed as being equivalent to that of assets held abroad.

Overall, this diversification of SOFAZ’s assets supports the country’s exceptionally strong foreign-currency liquidity and its net external creditor position.