Gold overtakes euro as global reserve asset, ECB says

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Gold has overtaken the euro as the world’s second most important reserve asset for central banks, driven by record purchases and soaring prices, according to the European Central Bank.

Bullion accounted for 20 per cent of global official reserves last year, outstripping the euro’s 16 per cent and second only to the US dollar at 46 per cent, data from an ECB report published on Wednesday showed.

“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.

“This stockpile, together with high prices, made gold the second-largest global reserve asset at market prices in 2024 — after the US dollar,” the ECB said.

While gold does not bear interest and is costly to store, it is seen by investors globally as the ultimate safe asset that is highly liquid, and neither exposed to counterparty risk nor sanctions.

In recent years, central banks have also been trying to diversify away from the US dollar amid concerns about geopolitical instability and US debt levels. The de-dollarisation trend accelerated, particularly among developing countries, after the Russian invasion of Ukraine, when the US targeted Russia’s access to financial markets.

“Gold demand for monetary reserves surged sharply in the wake of Russia’s full-scale invasion of Ukraine in 2022 and has remained high,” the ECB report said, adding that gold purchases appeared to be seen as a hedge against sanctions such as the freezing of financial assets.

“In five of the 10 largest annual increases in the share of gold in foreign reserves since 1999, the countries involved faced sanctions in the same year or the previous year,” the central bank’s analysis showed, adding that “countries that are geopolitically close to China and Russia” bulked up on gold more than others over the past three years.

A survey among 57 central banks that were holding gold last year also revealed that concerns about sanctions, expected changes in the global monetary system and the desire to become less dependent on the US dollar were drivers in emerging markets and developing countries.

Moreover, while gold historically became cheaper when real yields of other assets rose, this long-standing correlation has broken down since early 2022, with investors drawn to gold as a hedge against political risk more than as a hedge against inflation.

The ECB noted that the supply of gold in recent decades increased during times of high prices: “If history is any guide, further increases in the official demand for gold reserves may also support further growth in global gold supply.”