Gold Becomes Second-Largest Global Reserve Asset
Gold has surged to become the second-largest global reserve asset in 2024, according to a report from the European Central Bank (ECB). Central banks now hold vast amounts of gold, with stockpiles nearing levels seen in the 1960s. Gold’s rising value has made it the second-most significant reserve asset, trailing only the U.S. dollar in terms of value.
Gold’s Rising Importance in Central Bank Reserves
In 2023, gold and the euro were nearly equal, each accounting for around 16.5% of global official reserves. By 2024, gold had risen to 19%, while the euro’s share fell slightly to 16%. The U.S. dollar continues to dominate, representing 47% of global reserves. Central banks have increasingly turned to gold as a hedge against inflation, to diversify their holdings, and to support their currencies during economic distress.
Emerging Economies Turn to Gold for Stability
Emerging and developing countries have become particularly attracted to gold, using it as a safeguard against sanctions and the erosion of major currencies’ roles in the global financial system. With over 20% of global gold demand now coming from central banks, the demand has significantly increased, up from just 10% in the 2010s.
Gold Prices Surge Amid Geopolitical Tensions
Gold prices have reached record highs in recent years, especially since Russia’s invasion of Ukraine in February 2022. The combination of inflationary pressures, rising interest rates, and a flight to safe-haven assets has bolstered gold’s appeal. Countries like China, India, and Turkey have been major drivers of the gold rally.
Future of Central Bank Gold Purchases
While central bank gold purchases continue, there are signs that buying may slow down. According to experts, the perception of gold as a hedge against geopolitical and fiscal risks supports continued buying, but at a slower pace. Central banks have reduced their gold purchases by 33% in the first quarter of 2024, with China’s purchases notably declining.
Geopolitical and Economic Factors Impacting Gold Demand
Despite the slowdown in central bank purchases, gold demand remains strong, with jewelry and investment accounting for 70% of global gold demand. The ECB’s report suggests that geopolitical risks and global demand will continue to influence gold prices. With the U.S. adopting a more isolationist trade stance, countries may look to diversify their reserves away from the U.S. dollar, further boosting gold’s appeal as a safe asset.
Gold Supply and Long-Term Growth Prospects
Looking forward, the growth in gold reserves is linked to the elasticity of gold supply. The ECB notes that past increases in demand have been met with growth in above-ground gold stocks. If history repeats itself, further rises in official gold demand may spur additional growth in global gold supply.
