Gold Surpasses Euro as Second-Largest Reserve Asset, Driven by Central Bank Demand

Gold has surpassed the euro to become the world’s second-largest reserve asset, according to a detailed analysis published by the European Central Bank. This shift marks a significant change in global reserve management strategies, with central banks increasingly turning to gold to safeguard against inflation, currency pressures, and political risks. The metal now accounts for over 20% of global demand for gold, a substantial increase from around 10% a decade ago.

Central banks have been accumulating gold to hedge against the unpredictability of inflation and the rising tensions between global powers. Gold provides a stable asset that is not dependent on any single government, making it an attractive option for countries looking to diversify their reserves. The trend of moving away from foreign currencies, particularly the euro, has been driven by the need to buffer economies from potential financial shocks.

Emerging markets, in particular, have been moving away from Western currencies due to concerns about sanctions and currency isolation. The invasion of Ukraine by Russia in February 2022 accelerated this trend, as it led to a surge in inflation and interest rate hikes, making gold a more appealing safe haven. The instability in global markets, exacerbated by unpredictable trade policies under the U.S. administration, has further fueled the demand for gold.

China, India, and Turkey have been the leading buyers of gold, using it to reduce their reliance on the U.S. dollar and build more independent reserve positions. This shift has contributed to record-high global gold prices, with new highs being reached this year. However, the rally in gold prices has been volatile in recent months, with investors and banks reacting to rapid changes in U.S. economic policy.

Despite the volatility, the long-term outlook for gold remains positive. Central bank purchases of gold dropped by 33% in the first quarter of 2025 compared to the previous quarter, with China showing the most significant slowdown. However, the buying has not stopped, and central banks are expected to continue adding gold to their reserves due to the uncertain economic environment and the drive to diversify away from the U.S. dollar. Analysts predict that central banks will continue to buy gold, albeit at a slower pace, to hedge against fiscal, inflationary, and geopolitical risks.

The future of gold prices will largely depend on the supply of gold. Historically, gold supply has been flexible, responding to rising demand with increased above-ground stock. If this trend continues, further increases in official demand for gold reserves may support additional growth in global gold supply. This dynamic underscores the enduring appeal of gold as a reserve asset, providing a stable and independent hedge against global economic uncertainties.