Gold has now surpassed US Treasury bonds to become the largest reserve asset globally, driven by sustained central bank purchases and its sustained high price levels.

This shift in rankings is highlighted in a major annual report. The report states that the share of gold in total global official reserves, which includes foreign exchange, has risen to 27% by the end of the previous year, up from 20% a year earlier. In contrast, the share of US Treasury bonds fell from 25% to 22%.

Drivers of Change

The change in position is largely attributed to valuation effects. While the actual pace of central bank gold buying slowed last year, the international gold price surged significantly. The report notes that if calculated using the previous year's gold price, US Treasuries would still hold the top spot with a 26% share, while gold would only account for 16%.

The report's foreword explicitly states that ongoing geopolitical tensions continue to drive significant allocations to gold by central banks. It points out that sustained gold purchases by emerging economies, alongside the sharp rise in gold prices, have collectively increased gold's weight in total reserve assets.

This shift in reserve composition reflects a broader trend of de-dollarization and diversification of reserve currencies among many nations. However, the US dollar remains the world's primary reserve currency. The freezing of Russian dollar reserves following the 2022 conflict accelerated this diversification process. Even with gold's share rising substantially, US dollar-denominated assets still hold the top global position with a 42% share.

This trend is expected to profoundly impact global financial markets and the international monetary system. Total central bank gold reserves now exceed 36,000 tonnes, approaching levels seen during the era of the Bretton Woods system when currencies were pegged to the US dollar, which was itself convertible to gold.

Limitations of Gold as a Reserve Asset

The report also outlines the inherent limitations of gold as a reserve asset. It states that compared to major fiat currencies, gold has several drawbacks for official reserves: its price is highly volatile, it generates no interest income, and the storage and custody costs for physical gold are significant. More critically, the supply of gold lacks elasticity, making it difficult to adjust flexibly with changes in global liquidity demand.

This is not the first time a major institution has identified gold's market value as exceeding that of US Treasury holdings in reserves. Earlier this year, a report from the World Gold Council disclosed that the market value of global central bank gold reserves was approaching $4 trillion, surpassing the roughly $3.9 trillion in US Treasury holdings. The last time foreign official gold reserves were larger than US Treasury holdings was in 1996.

Current Market Outlook

Since military actions in the Middle East led to a sharp spike in oil prices, capital has flowed into the US dollar, pushing up Treasury yields. Consequently, the gold price has remained well below the all-time high it set earlier this year.

Inflationary pressures stemming from higher energy prices have led markets to price in a potential interest rate hike before the first quarter of next year. While gold is considered a hedge against inflation, it does not yield interest and often performs poorly in a high-interest-rate environment.

Recent minutes from a central bank meeting showed a growing number of officials believe a rate hike may be necessary. A market analyst commented, "Gold's dilemma is that geopolitical turmoil is no longer occurring in isolation. High energy prices are reigniting inflation fears, simultaneously pushing up Treasury yields and strengthening the dollar—a triple negative for gold."

A senior precious metals strategist noted in commentary that, in the short term, the Middle East situation remains the biggest influencing factor. He added that initial market optimism has faded as the conflict persists, and prolonged hostilities have further heightened inflation concerns. Gold has been under pressure since the military actions began.

Long-Term Bullish Views Persist

Despite recent weakness, several major banks maintain a positive long-term outlook for gold. Institutions like JPMorgan Chase and Goldman Sachs believe the price could still reach the $5,000 per ounce level in the future.

Analysts at JPMorgan Chase stated in a report that the root cause of this reserve asset shift is rising uncertainty about US global economic, political, and military hegemony. They argue that increasing domestic political polarization in the US could undermine its governance stability, which is the foundational support for the US dollar's status as a global safe-haven currency. Meanwhile, gold's status as a reserve asset continues to rise due to its lack of counterparty credit risk and its perceived safety advantages over fiat credit money. Over the past four years, many central banks have accelerated gold accumulation to hedge against asset risks stemming from US dollar-related geopolitical policies and to mitigate external risks.