Gold’s soaring ascent as a reserve asset in the portfolios of central banks spells possible trouble ahead for other financial assets, not least the dollar. The yellow metal may not yet have regained its status as an effective currency but it appears to be moving further in that direction.
Gold has overtaken the euro as the world’s second most important reserve asset behind the dollar for central banks, driven by record purchases and soaring prices, according to the European Central Bank.
Bullion accounted for 20% of global official reserves last year, outstripping the euro’s 16% and second only to the US dollar at 46%, data from an ECB report published on June 5 showed.
It is not difficult to understand why. Media reports have been bestrewn with news of geopolitical crises – actual and potential – so far this year. And while no major financial crisis has yet occurred the resilience of the global financial system is being severely tested.
The crisis in Iran, which has come under attack from both Israel and the United States in different ways, has given way to what is widely viewed as only a “fragile” truce. It comes close on the heels of potential trade wars triggered by US president Donald Trump’s tariff assaults while other threats abound, from Ukraine to East Asia.
All of this is obviously bad news for portfolio investors but it is even worse – much worse – for central banks which as “lenders of last resort” are charged with stepping in in the event of financial crises and picking up the costly damage.
Small wonder, then, that the world’s major (and some minor) central banks have become much more concerned with liquidity with which to address possible crises and that they have been adjusting their reserve portfolios markedly in this regard.
The dollar remains the principal reserve asset in the portfolios of central banks but a dollar crisis cannot be ruled out given Trump’s military adventurism in Iran. His latest display of brinkmanship on the geopolitical front and on trade issues will further erode an already manifested erosion of confidence in the US currency, in the view of many analysts.
The dollar has long been regarded (although with diminishing conviction by central banks) as the ultimate liquid asset, while gold has been viewed as less liquid by comparison. But as was noted at an Official Monetary and Financial Institutions Forum (OMFIF) expert seminar on June 24 that perception may now be changing.
“With gold overtaking the euro as the world’s second-largest reserve asset, central banks are increasingly turning to this precious metal amid ongoing currency volatility,” online trading platform Best Brokers noted in a recent report.
“Central banks continued to accumulate gold at a record pace,” the ECB wrote, adding that central banks for the third year in a row acquired more than 1,000 tonnes of gold in 2024, a fifth of the total global annual production and twice the annual amount in the decade of the 2010s.
The stock of gold held by central banks worldwide is approaching the historic highs of the postwar Bretton Woods era. Until 1971, global exchange rates were fixed to the US dollar, which in turn could be converted into gold at a fixed exchange rate.
Central bank gold reserves, which peaked at 38,000 tonnes in the mid-1960s, rose again to reach 36,000 tonnes in 2024, according to the latest ECB numbers. “Central banks worldwide now hold almost as much gold as they did in 1965,” the ECB report said.
Large buyers last year included India, China, Turkey and Poland, according to the World Gold Council.
A 30 per cent rise in the gold price last year was one factor behind the surge in gold’s share of global foreign reserves. Since the start of the year, the gold price has surged by another 27 per cent, hitting a historic high of $3,500 per troy ounce.
