(The opinions expressed here are those of the author, a columnist for Reuters.)
ORLANDO, Florida, Sept 4 (Reuters) – Worries over inflation, deteriorating U.S. fiscal health, Federal Reserve independence, and geopolitical instability are raising questions about the stability of long-term Treasuries, traditionally the world’s safest asset. In response, many central banks are turning back to that “barbarous relic”, gold.
The fortunes of gold and government bonds have diverged sharply this year, a split highlighted this week as the price of bullion struck a new high and many long-dated bond yields hit levels not seen in years or, in some cases, ever.
U.S. Treasuries haven’t sold off nearly as sharply as European or Japanese bonds, largely because U.S. debt still enjoys solid underlying demand from central banks and other official institutions managing foreign exchange reserves.
But Treasuries have essentially been “treading water” in global reserve portfolios in recent years, while central banks’ gold holdings have mushroomed, thanks to accelerating demand and soaring prices.
Gold has recently surpassed the euro to become the second-largest global reserve asset after the U.S. dollar and, for the first time since 1996, gold represents a bigger share of central banks’ reserves than Treasuries.
Central banks now hold 36,000 tons of gold, according to a European Central Bank study, having hoovered up huge volumes since the post-pandemic inflation spike and Russia’s invasion of Ukraine in 2022. They have increased their holdings by more than 1,000 metric tons in each of the last three years, a record pace and double the average annual purchases in the preceding decade.
With the price of gold currently above $3,500 an ounce – up a whopping 35% so far this year – central banks’ gold holdings are now worth around $4.5 trillion. That’s significantly more than their $3.5 trillion stash of Treasuries.
Moreover, Treasuries’ share of total reserves has been shrinking in recent years. It is now only 23%, by some measures, down from previous peaks of more than 30% in the 2010s, and below gold’s current 27% share.
The last time gold accounted for a greater share of global reserves than Treasuries was 1996. That date is significant. Many European countries sold gold aggressively in the late 1990s ahead of the launch of the euro. Surprisingly, the biggest seller was Britain, which wasn’t even joining the single currency union.
Gold slumped to around $250 an ounce in August 1999, down 40% from early 1996. This prompted central banks to adopt the “Washington Agreement” that September to effectively cap their sales.
In broad terms, the late 1990s was not a gold-friendly time. It was a period of solid growth, low and stable inflation, subdued macro volatility, and the rarest of rare occurrences – a U.S. budget surplus.
Nearly three decades on, the global macro environment is very different, one far more conducive to gold. Treasuries, in relative terms, are struggling.
Tavi Costa, macro strategist at Crescat Capital, says there are clear parallels between what we’re seeing today and the 1970s when monetary instability, inflation, and geopolitical shifts made gold a key strategic reserve asset for central banks.
The fact that foreign central banks now hold more gold than U.S. Treasuries is a “significant milestone” that signals a deeper, longer-term, structural change in reserve management, Costa argues. “What we are witnessing may well represent the early stages of a major realignment in global reserve composition.”
Could gold recapture the eye-watering 75% share of central banks’ reserve assets it held in the late 1970s and early 1980s? That’s unlikely and would probably require a prolonged economic crisis and years of double-digit inflation.
But what will stop the yellow metal’s footprint from expanding? That would probably require inflation pressures, geopolitical risk and economic uncertainty to cool significantly. From where we sit now, none of that seems likely in the near term, meaning reserve managers will continue to load up on gold.
You wouldn’t bet against it.
(The opinions expressed here are those of the author, a columnist for Reuters)
(By Jamie McGeever; Editing by Alex Richardson)
