Fiat currencies versus the physicality of gold

In our first article (Gold Overtakes the Euro to Become the World’s Second Largest Reserve Asset), we highlighted a major shift in the structure of global reserves – gold has moved ahead of the euro to become the world’s second most important reserve asset, after the US dollar.

This change did not come overnight. It reflects long-term trends – geopolitical tensions, inflationary pressures, and rising global debt. That is why we’re continuing this mini-series. In this second part, we look at the key differences between gold and so-called fiat currencies, and why central banks are increasingly turning to gold as the anchor of their reserves.

 

Fiat currencies: instruments of trust, not certainty!

Fiat currencies (such as the US dollar, the euro, or the Chinese yuan) rest entirely on confidence in their issuer, i.e. the state or its central bank. They are not backed by any inherent, commodity value. When governments face mounting debt, fiscal deficits, and geopolitical pressure, that confidence becomes fragile. And when money supply is expanded without real backing, these currencies quickly lose their footing.

 

Global money supply over time

 

Just look at the growth in money supply over recent years – vast sums of newly created money with no real backing. The natural consequence is inflation, currency depreciation, and a loss of purchasing power.

Since the end of the gold standard in 1971, the dollar has lost roughly 85% of its value. Europe faces heightened inflation and budgetary pressures. The euro’s share in official global reserves has been slowly declining, down to just 16% in 2024. Global debt now stands at over USD 324 trillion, around 30% of which is structural debt. This mounting debt burden undermines confidence in fiat currencies, boosting the appeal of gold as a “safe haven”.

 

Gold is a class of its own

Gold is not an asset built on promises or trust in institutions. Unlike fiat currencies, which central banks can expand without limit, the supply of gold is physically constrained, with global stocks increasing by only 1.4% to 2.2% a year.

Gold is not tied to any one country or political system, and carries no counterparty risk. Its value does not depend on the solvency of a state or institution.

It is globally accepted, time-tested, and has retained its worth through wars, currency reforms, and financial crises.

That is why central banks today no longer view gold as a relic of the past, but as a modern tool for safeguarding monetary stability. Gold has become a cornerstone of reserve diversification – universal, supranational, and independent of political cycles.

 

Trust is shifting

According to ECB and Financial Times data from 2024:

• Gold now makes up 20% of global foreign exchange reserves – overtaking the euro, which has slipped below 17%.
• Central banks bought more than 1,000 tonnes of gold in 2024 – the third record-breaking year in a row.
• Total official gold holdings have risen above 36,000 tonnes – the highest level since the Bretton Woods era.
• Today, one in every five reserve dollars is backed by gold.

 

These figures speak for themselves: gold is no longer an alternative; it is a return to certainty!

Recognising that fiat currencies are vulnerable in times of crisis, central banks are channelling an ever greater share of their reserves into gold – an asset that has outlasted wars, the collapse of empires, and currency reforms. 

Gold is reclaiming its status. Not only is it a safe haven, but it is also fast becoming the backbone of a new reserve policy. Holding it now means holding the future.

Which is why individual investors should also consider physical gold as part of their financial foundation. Not for gain alone, but for stability – just as central banks are doing today.