The Golden Glow of Central Bank Reserves

In the role of these columns as, among other things, a modest diary of the debate over monetary reform, let us mark the news that gold has passed the euro as the second largest reserve asset being held by central banks. That’s the news from Bloomberg, citing a report of the European Central Bank. It reckons that record-high purchases of gold have helped the monetary metal overtake the euro as the second-largest asset in the reserves of the world’s central banks.So much for the idea that gold is a relic of little relevance to today’s monetary crises. It turns out, per Bloomberg, that “record-high purchases and a blistering rally in prices” has animated this scoop. Bloomberg cites the European Central Bank as saying that the “share of gold in global foreign reserves at market prices reached 20 percent at the end of 2024, surpassing the euro at 16 percent, the European Central Bank.” That’s per a yearly assessment of the euro.It emerges against the backdrop of a weakening dollar, which Bloomberg characterizes as having “extended a steady decline” to reach 46 percent of global reserves. Bloomberg marks that gold’s “dizzying rise,” in which prices have doubled since late 2022, “has been fueled in part by central bank purchases.” It reckons that sovereign institutions have doubled their pace of buying gold to acquire more than 1,000 tons a-year for the past three years.The rise in gold holdings, as Bloomberg reports, suggests a kind of replenishment of central bank vaults, with reserves, at 1.16 billion ounces worldwide, “now back at levels last seen in the late 1970s.” A few years earlier, in the summer of 1971, central bank gold holdings amounted to 1.18 billion ounces. That was just before President Nixon abandoned the Bretton Woods gold exchange system that had yielded decades of low inflation growth.No doubt geo-politics is playing a role in all this. “Gold demand for monetary reserves surged sharply in the wake of Russia’s full-scale invasion of Ukraine in 2022 and has remained high,” Bloomberg quotes the ECB as marking. Bloomberg notes that the freezing of Russia’s foreign exchange reserves held in Group of Seven currencies after Russia’s invasion of Ukraine spurred some banks to reduce exposure to the Western financial system.The surging place of gold in central banks’ reserves, though, comes at a time of rising doubts about the status of “King Dollar,” meaning the dollar’s own role as the global reserve currency. At the beginning Mr. Trump’s second term, his camarilla — particularly Vice President Vance — began suggesting that the new administration would favor a weak dollar. Yet Mr. Trump always marked that the dollar would remain a reserve currency.We wouldn’t want to overstate the latest report. Neither would we want to understate the idea that the market is making its own decisions in respect of how much gold central banks are packing in. The questions about the greenback’s pre-eminence arise amid talk of a “Trump shock” to the world trade system, and gripes by, say, the Financial Times, of a “dented dollar,” and the Times’s suggestion that “Trump Will Regret Losing the Almighty Dollar.”Any suggestion of the dollar being replaced as the world’s leading reserve currency by another fiat currency could be premature, if the news from Bloomberg is any guide. For it would appear that the world’s central bankers, rather than turning to, say, the euro or the yuan to serve as a reliable store of value, or a bulwark at a time of economic uncertainty, are hedging in favor of the historic basis of monetary value itself, gold.

The Golden Glow of Central Bank Reserves

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