After Gold Surpasses Euro as Reserve Asset: How Far Is It from Defeating the US Dollar?

On Tuesday this week, the latest survey of fund managers released by Bank of America once again revealed a fact that most people already knew: nearly everyone on Wall Street is currently shorting the US dollar.

In fact, according to feedback from respondents in the Bank of America survey, these professional traders are shorting the US dollar on a record scale...

Let's set aside, for now, the debate over whether these record short positions in the US dollar could evolve into a record short squeeze. There is another question that is equally pertinent at the moment: Is the decline of the US dollar merely a one-time event, or is there something more inherently serious behind this evolution?

The well-known financial blog Zerohedge believes that the answer, as it turns out, may be the latter:

The decline of the US dollar is indeed a long-term process that began more than a decade ago. It accelerated after the Russia-Ukraine conflict in 2022, when the weaponization of the US dollar triggered a flight from it—de-dollarization—by any government concerned about potential SWIFT sanctions.

Interestingly, behind this shift, the biggest winner appears not to be other fiat currencies, but gold...

The Decline of the US Dollar and the Rise of Gold

As demonstrated by Société Générale's charts, since 2024, the de-dollarization process has not significantly benefited any other major reserve currency as expected—in a fiat currency system, the loss of one currency should lead to the gain of another. Instead, gold's share has notably increased during this period.

Société Générale pointed out that the decline in the US dollar's share in global foreign exchange reserves, or de-dollarization, paused temporarily during the 2020 COVID-19 crisis but resumed from the second half of 2023. Since Q3 2023, the share of US dollar foreign exchange reserves has fallen below 50%, a decrease of -5.8 percentage points. During this phase, gold was the main beneficiary, with its share increasing by 7.9 percentage points to 23.3%, reflecting central banks' efforts to diversify their reserve asset holdings...

This trend has also been cited by many industry insiders to explain the surge in gold prices...

A report released by the European Central Bank (ECB) last week actually reflects a similar shift in dynamics. According to the ECB, driven by record purchases and soaring gold prices, gold has surpassed the euro to become the second-largest reserve asset for global central banks—accounting for 20% of global official reserves in 2024, surpassing the euro's 16% and second only to the US dollar's 46%.

Note: Dark green represents the proportion of euros, yellow represents the proportion of US dollars, and blue represents the proportion of gold.

Although the above figures slightly differ from those in Société Générale's report, the underlying tone is consistent. According to data from the European Central Bank (ECB), central banks' gold reserves peaked at 38,000 mt in the mid-1960s and had risen again to 36,000 mt by 2024. The ECB's report states, "Global central banks' gold reserves are now almost at the same level as in 1965."

Has Gold Become a Giffen Good?

In terms of supply, the ECB points out that gold supply has increased during periods of high prices in recent decades: "If history is any guide, further increases in official demand for gold reserves may also support further growth in global gold supply."

In response, Zerohedge states that this was originally a brilliant theoretical thought experiment, with the only problem being thatsince gold has become a Giffen good—where demand only rises with increasing prices—any incremental supply will soon be absorbed by even greater demand.

Zerohedge points out that if this is indeed the case, and the current trajectory of gold accumulation and de-dollarization continues,then it is expected that gold will surpass the US dollar around 2030 to become the world's preferred reserve asset...by which time the scale of US debt may have reached $50 trillion.

Zerohedge believes that the irony behind this is that in the early 1970s, a small group of powerful individuals brought about the end of the Bretton Woods system, forcing the world to accept a financial system decoupled from gold. Fifty years later, without any external intervention, it seems that the world where gold once again becomes a "reserve currency" has returned.

Nature always seems to heal itself...