Gold has now surpassed the euro to become the number two reserve asset held by central banks, and sustained sovereign buying will likely impact the growth of the global gold supply going forward, according to new data published by the European Central Bank (ECB) on Wednesday.
In Gold demand: the role of the official sector and geopolitics, ECB Team Lead Economist Maurizio Michael Habib and his coauthors noted that gold holdings by central banks in 2024 reached 20% - compared to the euro’s 16% - levels last seen during the era of the gold standard.
“Adjusted for inflation, real gold prices in 2024 surpassed their previous peak seen during the 1979 oil crisis,” they wrote. “Meanwhile, gold reserves held by central banks stand at levels close to those last seen in the Bretton Woods era, although they now account for a far smaller share of total gold supply.”
“This stockpile, together with high prices, made gold the second largest global reserve asset at market prices in 2024 – after the US dollar,” they added.
Central bank gold demand also reached record high levels in 2024 – representing more than 20% of global demand – compared to an average of around 10% in the 2010s.
“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 authors noted. “However, gold purchases for jewellery consumption and investment continued to account for the bulk of global gold demand. In 2024 the decline in demand for jewellery consumption, particularly in China, was offset by higher demand for investment. The combined share of both categories remained at 70% of the global demand for gold.”
And the ECB said that central banks are buying gold not only for diversification purposes, but also to hedge against geopolitical risk.
“A survey of almost 60 central banks conducted by the World Gold Council between February and April 2024 identified the following three key drivers of central banks’ gold holdings: (i) a long-term store of value and an inflation hedge, (ii) (good) performance during times of crisis, and (iii) an effective portfolio diversifier,” they wrote. “Additionally, respondents pointed to default risks, geopolitical diversification and political risk as factors influencing their holdings.”
“Overall, the responses indicate that gold is valued by reserve managers primarily as a portfolio diversifier to hedge against economic risks, including inflation, cyclical downturns and defaults, and secondly as a hedge against geopolitical risk,” the authors added.
Central banks in emerging and developing economies also cited sanction concerns and the possible weakening of major currencies.
“One out of four such central banks referred to “concerns about sanctions” or the “anticipation of changes in the international monetary system” as determinants of their investment exposure to gold,” the ECB said. “The recent accumulation of gold reserves by official institutions tends to be concentrated in very few countries. Türkiye, India and China, for instance, top the list of the largest purchasers, jointly accumulating more than 600 tonnes of gold since the end of 2021.”
The report also noted other evidence that geopolitics was driving central banks to invest in gold. “Between 2008 and early 2022, gold prices were negatively correlated with real yields, providing a hedge against low nominal interest rates and/or high inflation,” the authors wrote. “This correlation broke down after Russia’s full-scale invasion of Ukraine, suggesting that gold prices have been influenced by other factors, such as geopolitical risk.”
“Recent research indicates that imposing financial sanctions is associated with increases in the share of central bank reserves held in gold,” they said. “Notably, in five of the ten 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 assortment of countries ramping up their gold purchases since the Russian invasion also suggests geopolitical considerations as a motive. “Countries that are geopolitically close to China and Russia have seen more marked increases in the share of gold in their official foreign reserves since the last quarter of 2021,” the authors noted.
Going forward, the ECB said that the impact of rising central bank demand on gold prices is likely to depend on the relative growth potential of the gold supply.
“It has been argued that gold supply has responded elastically to increases in demand in past decades, including through strong growth in above-ground stocks,” the ECB concluded. “Therefore, if history is any guide, further increases in the official demand for gold reserves may also support further growth in global gold supply.”
Story by Ernest Hoffman
