The Rise of Gold in Central Bank Reserves: An Analytical Overview

Reuters analyst Jamie McGeever recently pointed out that the trend of central banks increasing the proportion of gold in their reserves seems inevitable. This shift is fueled by a complex set of factors casting a shadow over the global economy.

Challenges Facing US Treasury Bonds

Growing concerns about inflation, the deteriorating financial health of the United States, doubts about the Federal Reserve's independence, and geopolitical turmoil are raising questions about the stability of long-term US Treasury bonds, long considered the "safest asset globally." As a result, many central banks are re-evaluating gold, an asset previously described as a "barbarous relic."

This year has seen a significant divergence in the performance of gold and Treasury bonds. Gold prices have reached new record highs, while long-term Treasury yields in many countries have risen to their highest levels in years, some even exceeding historical peaks.

Gold Surpasses Euro as Second-Largest Reserve Asset

In a notable development, gold has surpassed the euro to become the second-largest reserve asset in the world after the US dollar. The share of gold in central bank reserves has also exceeded US Treasury bonds for the first time since 1996. This increase is attributed to both the acceleration in demand for gold and the rise in its price.

Analyzing the Reasons for the Shift Towards Gold

A study by the European Central Bank showed that central banks have continued to purchase large quantities of gold since the rise in post-pandemic inflation and the Russian military operation in Ukraine in 2022. Total gold holdings by central banks currently stand at 36,000 tons. Over the past three years, the average annual increase in gold holdings by central banks has exceeded 1,000 tons, the highest rate ever, doubling the average annual increase in the previous decade.

With the price of gold exceeding $3,500 per ounce and rising by 35% since the beginning of the year, the current market value of gold held by central banks is estimated at approximately $4.5 trillion, significantly exceeding the size of US Treasury bonds they hold, which amounts to $3.5 trillion.

Decline in the Share of US Treasury Bonds in Global Reserves

Recent years have witnessed a continuous decline in the share of US Treasury bonds in total global foreign exchange reserves. Some statistics indicate that the share of US Treasury bonds currently stands at only 23%, a significant decrease from a peak exceeding 30% in the first decade of the 21st century, and lower than the current gold share of 27%.

Macroeconomic Shifts: From the 1990s to the Present

The last time the share of gold in global reserves exceeded the share of US Treasury bonds was in 1996. In the late 1990s, many European countries sold large quantities of gold in preparation for the launch of the euro. Surprisingly, the largest seller of gold at that time was Britain, which did not join the Eurozone.

Overall, the late 1990s were not a favorable period for gold, as the global economy was growing steadily, inflation was low and stable, and macroeconomic volatility was moderate. But today, the global situation has changed radically, with the current situation being more favorable for gold and more difficult for US Treasury bonds.

Comparison with the 1970s

Experts believe that the current situation is very similar to the 1970s, when monetary turmoil, high inflation, and geopolitical changes made gold a core strategic reserve asset for central banks.

Future Expectations

In conclusion, the trend of central banks increasing their gold holdings seems to be continuing, driven by economic and geopolitical concerns. While it is unlikely that gold will regain its position in the late 1970s and early 1980s, there are few factors that could prevent its share in reserves from continuing to grow.