Since the 19th century, gold has played a central role in the international monetary system. Gradually abandoned in favour of fiat currencies and the US dollar, gold has nevertheless made a strong comeback in central bank reserves in recent decades. Why are central banks now adopting a ‘back to gold’ policy?  

This reversal is explained by economic and geopolitical dynamics that have prompted governments to build up large reserves of yellow metal. This article traces the history of this movement, from the massive sales of the 1990s to the return to gold in the 2010s, via the record purchases of recent years.

The abandonment of the gold standard and the massive sales of the 1990s 

The gold standard, which dominated the global financial system until the first half of the 20th century, was a monetary regime in which the value of currencies was directly linked to a stock of gold held by central banks. After the Second World War, the Bretton Woods system (1944) maintained an indirect link with gold, with the dollar convertible into gold at a fixed rate of $35 per ounce. However, in 1971, under President Richard Nixon, the United States suspended this convertibility, putting an end to the gold standard and ushering in the era of floating fiat currencies.

In the 1990s, central banks sold off their gold on a massive scale as they considered it an obsolete asset that did not yield interest. The UK under Gordon Brown sold almost 400 tonnes of gold between 1999 and 2002, representing around 60% of its reserves, at an average price of $275 per ounce, far below today's prices. Other central banks, particularly in Europe and Canada, followed this trend and reduced their exposure to gold in order to increase their holdings of dollars and government bonds. 

Paradigm shift in the 2010s 

With the financial crisis of 2008 and the economic instability that followed, the perception of gold began to change. Central banks gradually stopped selling their reserves and some started buying gold again to protect against inflation and currency fluctuations.

Between 2010 and 2020, demand for gold from central banks has risen sharply. Countries such as China, Russia and India have begun to accumulate gold to diversify their reserves and reduce their dependence on the US dollar. While central bank demand for gold was only 80 tonnes in 2010, it has grown throughout the decade. In 2018, central banks bought more than 650 tonnes of gold, the highest level since the end of Bretton Woods. This phenomenon can be explained by immediate geopolitical reasons: the arrival of Trump and the need to regain a form of independence, very accommodating monetary policies with quantitative easing, etc.

This graph illustrates perfectly the rise in central bank gold purchases. Despite reaching a low in 2020, central bank gold purchases peaked in 2022. This reversal of monetary doctrine, after having ‘buried’ gold in the 1990s, has also had the effect of amplifying the rise in the price of gold over the last 20 years. 

‘Back to gold’: a failure of the monetary system? 

Since the 2008 financial crisis, central banks have massively increased the size of their balance sheets through quantitative easing policies. The Federal Reserve (FED) has increased its balance sheet from around 900 billion dollars in 2008 to over 9,000 billion dollars in 2022. Similarly, the European Central Bank (ECB) has seen its balance sheet grow from €2,000 billion to more than €8,000 billion over the last decade.

Against this backdrop of massive money printing, gold has once again become a strategic asset for central banks, serving as collateral to bolster confidence in the financial markets. Gold is classified as an A1 asset under ECB regulations, which means that it is considered to meet the highest standards of liquidity and security. Unlike sovereign bonds, gold carries no counterparty risk. This makes gold particularly attractive in times of economic and monetary crisis.  

As a result, central banks have stepped up their gold purchases in recent years in order to strengthen the basis of their balance sheets and prepare for a possible transition to a more diversified monetary system in the face of the volatility of traditional assets (such as bonds). This strategy reflects a growing mistrust of the dominance of the US dollar and a desire to diversify international reserves.

The countries holding the most gold 

The countries holding the largest gold reserves are the Western countries. These are mainly the United States, Germany, Italy and France, where the importance of gold in the nineteenth century still seems to explain the large quantity of the precious metal in their vaults. 

This stock of gold becomes even more significant on the scale of the eurozone. Indeed, if we consider the stock of gold on the scale of the eurozone, it is equivalent to a stock of more than 10,000 tonnes of gold. The leading stock of monetary gold would therefore be European. While the absolute stock of gold, in tonnes, is important for establishing a country's monetary hegemony, it is also interesting to note the weight of gold in relation to foreign exchange reserves held. The main world stocks are :  

* UNITED STATES: 8,133 tonnes of gold (around 68% of their foreign exchange reserves) 

* GERMANY: 3,355 tonnes (68% of reserves) 

* ITALY: 2,452 tonnes (66% of reserves) 

* FRANCE: 2,437 tonnes (65% of reserves) 

* RUSSIA: 2,299 tonnes (24% of reserves) 

* CHINA: 2,113 tonnes (4% of reserves)

Source : Central Banks Gold Reserves by Country | World Gold Council 

According to the World Gold Council's list, the United States holds the most gold as a proportion of its foreign exchange reserves, followed by Germany, Italy and France. Within an economy, foreign exchange reserves are foreign currency reserves that enable a country to make external payments (foreign trade, financial flows, etc.). A high proportion of gold reflects a country's desire to establish its relations with the outside world and to hold a stable, recognised asset. 

Consequently, European countries keep a high proportion of gold in their reserves. China's stock of gold therefore seems very small compared with its foreign exchange reserves and the size of its economy. Indeed, China's interest in gold is relatively recent and the Middle Kingdom does not have a sufficient monetary heritage. As a result, China and Russia are seeking to increase their gold holdings in order to limit their exposure to the dollar, and ‘enter the big league’. 

Recent massive purchases by central banks 

Recent upheavals, both caused by the COVID crisis, which led to the expansion of central banks' balance sheets, and by the return of war, have led to a massive return of gold to central bank strategy.

The years 2022 and 2023 saw renewed interest in gold from central banks. According to the World Gold Council, in 2022, central banks bought 1,136 tonnes of gold, an all-time record. In 2023, this trend continued with around 1,037 tonnes of net purchases. The main buyers were : 

* CHINA: the People's Bank of China added more than 225 tonnes of gold in 2023. 

* TURKEY: in 2022, Turkey bought 148 tonnes, continuing its diversification drive. 

* RUSSIA: in the wake of Western sanctions, Russia has increased its gold reserves to compensate for the exclusion of its banking system from international financial markets. 

This massive accumulation of gold reveals a strategy by central banks to break away from the domination of the US dollar and strengthen their reserves in the face of an uncertain economic environment.

Gold in central banks under the gold standard 

Under the gold standard, central banks were required to hold large reserves of gold to guarantee the convertibility of their currencies. Until the Second World War, most gold was stored in the United States and the United Kingdom, providing the basis for global monetary stability. 

The Bretton Woods Agreement consolidated this system by linking the dollar to gold and making the US currency the international benchmark. Under this system, all other currencies were pegged to the dollar, which served as the global benchmark. Central banks accumulated dollar reserves, knowing that these were supposed to be convertible into gold. This system ensured exchange rate stability, but was also limited by the availability of gold. Rising US public spending and trade deficits made convertibility difficult to sustain, leading to the collapse of the system in 1971 when Richard Nixon suspended convertibility. 

Today, although gold is no longer directly linked to currencies, it remains an essential strategic asset for central banks. Its role as a safe haven and its ability to preserve wealth in the face of inflation explain why it has once again become a pillar of national reserves.

Conclusion 

Gold seems to be making a strong comeback in the monetary system. Since the end of the gold standard, gold had been abandoned by central banks, which considered it to be an ‘obsolete’ asset that only provided physical constraints (storage of ingots, etc.). But gold sales in the 1990s have given way to massive purchases in recent years. This represents a genuine change in monetary doctrine.  

There are many reasons for this historic turnaround. Gold purchases gradually made a comeback in the 2010s, after the financial crisis. The 2008 crisis probably reaffirmed the need for stable assets that are recognised by all institutions. The intensification of gold purchases also mirrored the levelling off of globalisation, giving rise to independence-oriented monetary policies. The arrival of Trump in 2016, for example, has encouraged many countries to avoid the dollar, a strategy that has been reaffirmed by the war in Ukraine.

Another explanation for gold's massive comeback is the considerable increase in central banks' balance sheets. In recent years, central banks have bought up a considerable quantity of assets, mainly government bonds. This suggests that central banks are buying gold to ‘adjust’ their balance sheets in the face of the massive purchases of recent years, in order to keep a more or less constant share of gold. A final explanation is the instability of asset values on central bank balance sheets. Gold appears to be a stable asset, capable of ensuring the security and durability of a monetary authority's balance sheet.