Gold overtook US Treasuries as the largest component of official foreign reserves by end-2025, as central banks shifted their reserve mix in response to geopolitical uncertainty and market moves. European Central Bank data show gold rising to 27% of total reserves, up from 20% a year earlier; over the same period, the share of US Treasuries fell to 22% from 25%, while the euro held steady at 15%. The ECB attributes much of gold’s rise in the reserve mix to valuation effects after a 2025 price rally, while physical buying eased to about 850 tonnes in 2025 versus more than 1,000 tonnes in each year from 2022 to 2024.
Country-level purchases in 2025 were led by Poland with 100 tonnes, followed by Kazakhstan, Brazil, China and Türkiye, while stablecoin issuer Tether bought more than 100 tonnes. The ECB also records that some central banks reduced gold holdings in 2026 to cushion the economic impact of the Iran war; Türkiye’s central bank sold or loaned around 130 tonnes to support the lira, described as one of the largest reserve drawdowns in recent years. The figures point to a broader effort to lessen reliance on the US dollar, which remains the dominant reserve currency.
Central Bank Demand and Market Impact
We see the structural shift of central banks preferring gold over US Treasuries as a long-term bullish signal that is not going away. This trend provides a strong underlying support for gold prices, suggesting any dips should be viewed as buying opportunities. For the coming weeks, this foundational demand is the most important factor in our strategy.
The price of gold has been consolidating around $2,850 an ounce after hitting a record high above $3,000 earlier this year. Recent World Gold Council data for May 2026 confirmed a net inflow of $2.8 billion into gold-backed ETFs, showing that investor demand is still robust. This indicates strong support at current levels.
Geopolitical Factors and Investment Strategy
Geopolitical risks, especially the ongoing conflict involving Iran, remain a primary catalyst for sudden price moves. We are closely monitoring tensions in the Strait of Hormuz, as any escalation would likely trigger a flight to safety, benefiting gold. This uncertainty is keeping the market on edge.
This shift is happening as the latest economic data shows a slowdown, with US GDP for the first quarter of 2026 revised down to 1.1%. This has led markets to price in a higher probability of a Federal Reserve rate cut before the end of the year, which would lower the opportunity cost of holding gold. We view this as a significant tailwind for the precious metal.
Given this backdrop, we believe implied volatility in gold options is still reasonably priced. We are using this environment to purchase long-dated call options on gold futures, providing exposure to upside potential while capping our maximum loss. This allows us to profit from a sharp move higher driven by either geopolitical events or central bank actions.
However, we are also mindful of potential selling pressure from nations needing to defend their currencies, as Turkey did earlier this year. Recent reports suggest that other emerging market central banks facing fiscal pressure have marginally reduced their gold holdings in May. This could create short-term price weakness and represents the main risk to our bullish view.
