Gold Overtakes Euro as Second Largest Global Reserve Asset

Gold has officially surpassed the euro to become the second-largest global reserve asset, following the US dollar, according to a recent report by the European Central Bank (ECB). Rising geopolitical volatility and increasing concerns over economic sanctions have driven this shift, highlighting a growing reliance on gold among central banks worldwide.

Central banks are increasingly favouring gold as a hedge against both economic and geopolitical uncertainties. The ECB report revealed that in 2024, gold constituted 20 per cent of global official reserves, outpacing the euro, which accounted for only 16 per cent. The US dollar maintained its position as the most dominant asset, representing 46 per cent of reserves.

Historically, the relationship between gold prices and real yields has been inversely correlated. However, this trend began to diverge following Russia’s invasion of Ukraine in 2022. The ECB noted that the rising demand for gold was no longer solely linked to inflation or monetary policy but was increasingly driven by geopolitical and economic risks. For many nations, gold is proving to be an essential safeguard in this unpredictable global landscape.

Data from the ECB also provided insight into the motivations behind these changes. Five out of the ten largest annual increases in gold reserves since 1999 occurred during or shortly after years in which the nations involved faced economic sanctions. This reflects a shift towards gold not just for its monetary value but also for its independence from geopolitical constraints tied to fiat currencies.

Apart from this, central banks have recognised gold’s enduring appeal as a portfolio diversifier. It has consistently delivered value during periods of economic instability, offering protection against inflation, recessions and other financial risks. Gold’s long-term ability to hold its value and its reliability in times of crisis has made it increasingly attractive.

The report revealed that gold reserves held by central banks have reached levels close to those last seen during the post-war Bretton Woods era. However, it is worth noting that gold demand by official reserves today represents a much smaller share of overall supply, comprising only 17 per cent compared to nearly 60 per cent at its historic peak. Jewellery and investment demand continue to dominate global gold consumption, accounting for approximately 70 per cent of total demand.

This renewed preference for gold amid economic and geopolitical uncertainty underscores its role as a vital reserve asset, offering both stability and diversification to central banks’ portfolios.