Gold is now the world's second-largest reserve asset — but central bank appetite is waning

Central banks' increasing gold accumulation has elevated the precious metal to the second-largest global reserve asset in 2024, surpassing the euro and trailing only the U.S. dollar, according to an ECB report. While geopolitical and economic uncertainties, particularly since the Russia-Ukraine war, have driven central bank demand for gold as a safe-haven asset, recent data indicates a potential slowdown in the pace of these purchases, with Chinese acquisitions notably decreasing. Despite this moderation, analysts anticipate continued, albeit slower, gold accumulation by central banks seeking diversification away from the U.S. dollar amid persistent global uncertainties.

Analysis

Gold's prominence in global finance has significantly increased, with the European Central Bank reporting it as the second-largest global reserve asset in 2024, constituting 19% of holdings, surpassing the euro at 16% and second only to the U.S. dollar at 47%. This shift is largely attributed to escalating central bank acquisitions, driven by persistent geopolitical tensions, inflation hedging strategies, and a desire for diversification, particularly among emerging and developing economies concerned about sanctions and the stability of major currencies. Central bank gold stockpiles are now approaching levels last seen in the 1950s and 1960s, and these institutions represent over 20% of global gold demand, a substantial increase from approximately 10% in the 2010s. While the rally, fueled significantly by events like Russia's invasion of Ukraine and subsequent inflation spikes, has seen gold prices reach record highs, recent data suggests a potential moderation in this trend. Central bank gold purchases declined by 33% quarter-on-quarter in the first three months of the year, and Chinese buying, a key demand driver, has notably slowed. Despite this, analysts like those from Capital Economics and ING anticipate continued, albeit potentially slower, gold accumulation by central banks due to the prevailing uncertain economic climate and the strategic imperative to diversify away from the U.S. dollar. The ECB also notes that the future price impact will depend on gold supply's elasticity, which historically has responded to demand increases.

Key Decisions for Investors

• Given the sustained, albeit potentially moderating, central bank demand for gold driven by geopolitical uncertainties and diversification needs, investors should consider maintaining or strategically increasing portfolio allocations to gold as a hedge and for long-term value preservation.
• Closely monitor central bank purchasing trends, particularly from significant buyers like China, and the overall pace of accumulation, as these will serve as critical indicators for near-term gold price movements and market sentiment.
• Evaluate the potential for gold supply to expand in response to demand, as noted by the ECB, as increased supply elasticity could influence long-term price appreciation even if demand remains robust.