Introduction to Gold’s Relentless Rally
Gold has continued its powerful rally, with prices reaching just cents away from $3,600 per ounce on Friday. This surge is driven by weak US jobs data, which has further raised expectations for bullion-supportive Federal Reserve rate cuts. The metal has surged 37% so far this year, following a 27% gain in 2024, driven by US dollar weakness, a softening monetary policy backdrop, and wider geopolitical and economic uncertainty.
Central Banks’ Role in Gold Price Increase
One significant factor silently pushing gold prices up is central banks around the world buying gold. Global central banks bought a net 10 tonnes in July, based on reported data, a moderate net allocation compared to previous months. Despite this slower pace of net buying, central banks continue to be net buyers of gold even in the current price range. They hold gold in their foreign currency reserves portfolio as a relatively low-risk asset, often seen as a hedge against inflation and geopolitical or economic uncertainty.
Gold as a Reserve Asset
In a significant shift within the global financial system, gold has overtaken the euro to become the second-most important reserve asset held by central banks, trailing only the US dollar. For the first time in nearly three decades, gold now makes up a larger portion of central bank reserves than US Treasury securities. This landmark development reflects broader concerns over inflation, geopolitical instability, and shifting monetary policy dynamics. According to a recent report by the European Central Bank, central banks worldwide now collectively hold approximately 36,000 metric tons of gold, marking a dramatic accumulation trend that accelerated following the COVID-19 pandemic and the 2022 Russian invasion of Ukraine.
Gold Holdings and Market Value
The surge in gold holdings has been accompanied by a sharp rise in the metal’s market value. With gold prices currently trading above $3,500 per ounce, a staggering 35% increase since the beginning of the year, the total value of gold held by central banks is estimated at around $4.5 trillion. In comparison, their holdings of US Treasuries now amount to approximately $3.5 trillion. This shift highlights a broader trend in the composition of global foreign exchange reserves, with the share of Treasuries in central bank reserves steadily declining and gold now accounting for roughly 27%.
India’s Central Bank and Gold Holdings
India’s central bank has also preferred to increase its gold holdings over US Treasury bills to bolster foreign exchange reserves. The latest US Department of Treasury and Reserve Bank of India (RBI) data shows that India’s investments in US T-bills fell in June compared with a year ago, while its gold holdings rose during the same period. India remains among the top 20 investors in US T-bills, ahead of Saudi Arabia and Germany, with holdings standing at $227 billion in June 2025, albeit lower than $242 billion in June last year.
Drivers Behind the Transition
Analysts point to multiple drivers behind this transition, including persistently high inflation, currency volatility, waning confidence in Western fiscal policies, deteriorating US fiscal health, concerns over US Federal Reserve independence, and geopolitical instability. These factors have prompted central banks, especially those in emerging markets, to diversify away from traditional reserve assets like US debt. Gold, with its intrinsic value and lack of counterparty risk, has increasingly become the asset of choice in an era of heightened financial caution.
Experts’ Views on Gold’s Future
Tavi Costa, macro strategist at Crescat Capital, believes 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 US Treasuries is a "significant milestone" that signals a deeper, longer-term, structural change in reserve management. However, experts also believe it is unlikely that gold will return to the dominant position it held in the late 1970s and early 1980s, when it represented a staggering 75% of global reserve holdings.
Will Central Banks Continue to Buy Gold?
Annual net purchases of gold by central banks have exceeded 1,000 metric tons each year since 2022, according to consultancy Metals Focus. Developing countries are seeking to diversify from the dollar after Western sanctions froze roughly half of Russia’s official foreign currency reserves in 2022. Official numbers reported to the International Monetary Fund reflect only 34% of the 2024 total central bank gold demand estimate, according to the World Gold Council. All signs suggest that central banks are likely to continue buying gold in the foreseeable future, though the pace and scale of these purchases may fluctuate depending on global economic and geopolitical conditions.
Conclusion
In conclusion, gold’s relentless rally continues, driven by weak US jobs data and central banks’ purchases. The metal has surged 37% so far this year, and its price is expected to continue rising as central banks diversify their reserves away from traditional assets like US debt. With its intrinsic value and lack of counterparty risk, gold has become an attractive alternative for central banks seeking to safeguard their assets. As global tensions persist and monetary landscapes evolve, gold appears poised to play an increasingly prominent role in the strategies of the world’s central banks.
