The national banks of Hungary, Serbia, France and Thailand have increased their gold reserves in the last year, an asset usually considered a refuge when difficult times are announced. At the Bank of Russia, the precious metal came to represent 20% of total reserves. What is the cause of these acquisitions? Fear? Propaganda?
In the years of economic boom before the current crisis, the National Bank of Hungary, then led by a populist ally of the Budapest government, decided to repatriate its gold reserves. Then, about three tons of Hungarian gold, worth about
$ 130 million was stored in London. Repatriation of the precious metal was a fad among central banks at the time. Those in Austria, Germany and the Netherlands were doing this. In 2017, the German central bank completed a program to repatriate gold equivalent to $ 31 billion from Paris and New York. The aim was to strengthen “confidence and a sense of security”. It was also a sign that German gold was no longer in danger of falling into the hands of the Soviet army.
The Hungarian central bank said the repatriation strengthens market confidence in Hungary. But the Hungarian central bank went further and earlier this year tripled its precious metal reserves to 94.5 tonnes, the highest level in decades. The acquisitions were justified by the stabilization of the economy during the crisis caused by the COVID-19 pandemic, when inflationary risks increase and debt swells. But the tripling of reserves comes as the central bank governor, a former ally and close aide to Prime Minister Viktor Orban, has become a staunch critic of his government.
Meanwhile, inflationary risks have turned into an unprecedented wave of inflation that the central bank is trying to break through by raising interest rates. However, Orban prefers low interest rates, for many of his economic stimulus ideas are based on cheap loans. Or cheap loans feed inflation.
At the beginning of the year, Hungary was in first place in Central and Eastern Europe in gold reserves per capita, according to Reuters, which quotes the central bank’s website. The site also states that “the emergence of jumps in global debt markets or fears created by inflation further increase the importance of gold in the national strategy as an asset-shelter and as a custodian of value.”
In 2018, the institution spent one billion euros on precious metal purchases. In February, gold reserves amounted to 1.5 billion euros, to total national reserves of 33 billion euros. In April, analysts estimate, reserves, which include new purchases, had reached 4.5 billion euros, or almost 15% of the total.
Analysts have interpreted the acquisitions as the central bank’s expectations that bond yields will rise in international markets, meaning that the price of risk will rise (debt becomes more expensive), which would erode the value of the bond portfolio. The financial markets news and analysis portal fxstreet.com writes that the central banks’ appetite for precious metal has increased in recent months, in part due to global inflationary pressures and disruptions in energy markets.
The Bank of Russia, which in times of crisis often faces the depreciation of the ruble, as does Hungary, whose currency is the forint, holds 2,300 tons of gold. The amount will increase considerably in the coming years, experts say. They also say that the accumulation of gold is a departure from the dollar, one of the assets that traditionally make up foreign exchange reserves.
This is because in the last five years the US government has become more financially negligent, with debt in dollars reaching record levels. Thus, the US and the dollar risk losing confidence in the eyes of the world. Fxstreet.com notes that the decline in the purchasing power of the dollar is increasingly visible in recent years.
Another country that has indicated it would like to consolidate its gold reserves is Poland. The governor of the central bank, a close ally of the ruling party seeking a new mandate, said gold should reach 20% of reserves. The banker wants the institution to buy at least 100 tons of gold to demonstrate the country’s economic strength. Under his guidance, of course. Poland’s central bank bought 126 tonnes of gold in 2018 and 2019 repatriated 100 tonnes from London, doubling its reserves. Serbia also boasts the gradual accumulation of gold to “support the stability of the Serbian financial system in a time of uncertainty and to protect against the increased risk of a global crisis.”
For central banks, one of the main roles of gold is to diversify reserves, writes Reuters. Banks are responsible for the currencies of their nations, but their value varies depending on how the strength or weakness of the economy is perceived. In difficult times, banks may be forced to print more money because interest rates, the traditional lever for monetary control, have been close to zero for more than a decade. This increase in the money supply may be necessary to prevent economic turmoil, but at the cost of currency devaluation. Gold, on the other hand, is a physical asset and available in finite quantities. As such, it is a natural hedge against inflation. Because gold does not present credit risks, it serves as a reliable source in a country and in all economic environments, which makes it one of the most important reserve assets in the world, along with government bonds.
The inverse relationship of gold with the US dollar is an element that increases its attractiveness. When the dollar declines in value, gold usually rises, allowing central banks to protect their reserves during periods of market volatility. The US and Germany have the largest gold reserves in the world.