Gold prices have continued their relentless ascent, nearing the significant threshold of $3,600 per ounce as of Friday. This surge has been fueled by disappointing US jobs data that has heightened expectations for potential rate cuts by the Federal Reserve, which tend to support bullion prices. With a staggering 37% increase in value so far this year, following a 27% rise in 2024, gold’s momentum is attributed to a weakening US dollar, a softer monetary policy environment, and escalating geopolitical and economic uncertainties.
One subtle but powerful force driving up gold prices is the aggressive acquisition of the metal by central banks around the globe. Recent reports from the World Gold Council indicate that global central banks purchased a net total of 10 tonnes of gold in July. While this figure represents a moderate buying pace compared to previous months, it underscores a strong trend of net purchasing that persists even in a relatively high price environment. Traditionally, central banks treat gold as a low-risk asset within their foreign currency reserves, often using it as a hedge against inflation and geopolitical instability. However, the United Nations recently noted that uncertainty has now become systemic, affecting particularly developing economies.
China’s central bank has emerged as a significant player in this gold rush, ramping up its purchases since 2023. This strategy appears to be part of a broader effort to decrease reliance on the US dollar and align its reserves with its status as the world’s second-largest economy. This aggressive accumulation coincides with a broader rally in gold prices that has propelled them to unprecedented highs from 2023 to 2025.
In a noteworthy shift within the global financial landscape, gold has now surpassed the euro to become the second-most important reserve asset held by central banks, trailing only the US dollar. For the first time in nearly thirty years, gold constitutes a larger share of central bank reserves than US Treasury securities, signaling significant changes in reserve management strategies. A recent European Central Bank report reveals that central banks now hold approximately 36,000 metric tons of gold, a considerable increase driven by economic uncertainties stemming from events like the COVID-19 pandemic and Russia’s invasion of Ukraine.
Over the last three years, central banks have collectively purchased more than 1,000 metric tons of gold annually, double the average seen in the previous decade. This trend has significantly increased the total value of gold held by central banks, which, at current prices, is estimated to exceed $4.5 trillion. In contrast, their US Treasury holdings have decreased to approximately $3.5 trillion, evidencing a substantial reevaluation of investment portfolios.
Countries like India are also following suit, opting to increase their gold reserves rather than US Treasury bills. Recent data from the US Department of Treasury and India’s Reserve Bank indicates a decrease in India’s investments in US T-bills, while its gold holdings have risen. This trend mirrors a broader global shift among nations increasingly looking to diversify their reserves away from traditional dollar-based assets. Despite this, India remains a significant holder of US T-bills, ranking among the top 20 investors.
The motivations behind this transformation are manifold. Persistently high inflation, currency fluctuations, and declining confidence in Western fiscal policies have led many emerging markets to diversify their reserves. Gold’s intrinsic value and absence of counterparty risk make it an increasingly attractive option. Tavi Costa, a macro strategist at Crescat Capital, highlighted the current parallel to the 1970s, when geopolitical instability and inflation made gold an essential reserve asset. Costa noted that foreign central banks now holding more gold than US Treasuries signifies a deeper structural change in reserve management.
However, experts caution that while enthusiasm for gold is on the rise, it is unlikely to return to the dominant role it played in the late 1970s, when gold comprised about 75% of global reserve holdings. Achieving such a level again would likely necessitate severe economic downturns and sustained inflation rates, scenarios that are currently not widely anticipated.
Looking ahead, central banks appear poised to continue their robust purchasing of gold, albeit at varying speeds depending on economic conditions. Trends indicate that annual net purchases could reach 900 tons this year, projected to be double the historical averages seen from 2016 to 2021. This ongoing trend reflects a collective desire among central banks, particularly in emerging markets, to lessen their dependency on the US dollar, particularly following the sanctions that impacted Russian reserves in 2022.
Inflation concerns remain a strong motivator for gold purchases, with many central banks viewing it as a safeguard against currency depreciation. Additionally, the current geopolitical climate—marked by conflicts such as the Russia-Ukraine war—has prompted many nations to reconsider reserve strategies, with gold being viewed as a stable and strategically secure asset.
While the pace of gold buying is expected to remain strong, experts suggest it may not continue indefinitely at the current levels. Several factors, including stabilizing global economic conditions and potential increases in interest rates, could alter central banks’ gold acquisition strategies. Overall, as economic uncertainties persist and monetary landscapes evolve, gold is likely to assume a more prominent place in the reserve management strategies of countries around the world.
