In an unexpected move, Hungary’s Central Bank announced earlier this month it had increased ten-fold its gold holdings, marking the country’s first purchase of the precious metal since 1986 and bringing total reserves to 31.5 tons, compared to 3.1 up until now.
In the last three months, Poland’s Central Bank also undertook its largest gold purchase since 1998, adding 9 tons over the summer and 4 additional tons in September, bringing the country’s total reserves to 117 metric tons, according to data released by the International Monetary Fund, the highest level since 1983.
Central banks around the world turned to gold since 2008
Despite those relatively important increases, neither Poland nor Hungary are ranked in the top 30 of the world’s biggest gold holders. The countries with the largest gold reserves at the end of the second quarter this year were the United States (8.133 tons), Germany (3.371 tons) and Italy (2.451 tons), followed by France (2.436 tons), Russia (1.944 tons), China (1.842 tons), Switzerland (1.040 tons), Japan (765 tons), the Netherlands (612 tons), Turkey (568 tons) and India (566 tons).
Gold’s appeal for central banks is not a new phenomenon, and the metal was an integral part of the Bretton-Woods international monetary system until 1971. When the system was abandoned by U.S. President Richard Nixon, central banks started selling their gold assets, up until the 2008 financial crisis, when gold was once more seen as a highly sought-after crisis management investment. Since 2010, central bankers around the world have turned from net sellers to net buyers, with the buying binge accelerating over the years and primarily led by Russia, Kazakhstan and Turkey, whose purchase accounted for 86% of central banks purchases in the first six months of this year.
There is, therefore, nothing really new in central bankers’ interest for the coveted metal, a historically-proven ideal asset to own in case of economic downturn and geopolitical uncertainty. Nathalie Dempster from the World Gold Council (WGC) explained to Bloomberg that “central banks have three main objectives when they are thinking about reserve assets: to keep their assets safe, to keep their assets liquid and to generate returns”. Gold, an effective tool for crisis prevention and crisis management, meets all three objectives.
What’s behind Poland and Hungary’s move?
But EU countries had, until now, largely stayed out of this buying spree. The fact that gold is now being bought and stored in large quantities by Poland and Hungary, both of which have been at odds with Brussels over alleged breaches to the rule of law and facing disciplinary action from the bloc, makes analysts wonder about the odd timing of these purchases.
Poland’s central bank remained cryptic about its most recent purchase and declined to comment, only citing the drop of gold’s price as the main factor. Hungary, on the other hand, has been much more vocal about its buying spree: the press release announcing the tenfold increase also included a “Golden Book”, retracing the relationship of the country with the precious metal throughout Hungarian history and even boastfully posted pictures of the acquired bullions. Contrary to Polish gold reserves, almost entirely deposited in the vaults of the Bank of England in London, Hungary has already started repatriating its recently-acquired bullions.
Hungarian authorities also went to great lengths to adopt a comforting tone and minimize the importance of the purchase: “the current decision of the Hungarian National Bank was led by the goal of stability, and there are no investment concerns behind the holding of gold reserves”, the press release read. “Gold is not only for extreme market environments, structural changes in the international financial system and deeper geopolitical crises. Gold also has a confidence-building effect in normal times”, authorities argued.
Analysts agree, however, that there’s more to it than just low prices and portfolio diversification. Those purchases, undertaken amid expectations of higher global inflation and strong underlying fiscal deficits, may also be a way for the two Central European states to prepare for tougher economic times and brace for a potential currency crisis. “Central banks are trying to maintain some hold on their currencies by storing gold” and preserve “domestic currency values against a rising dollar”, RBC Wealth Management managing director George Gero told Reuters.
The buying spree of Russia’s national bank, the biggest buyer of gold for the sixth year in a row, is also driven by geopolitical considerations: the wish to minimize its exposure to the U.S. dollar and progressively shift away from a U.S.-dominated international financial system. Many saw Hungary’s recent purchase as a way to follow Russia’s lead and ensure means for trade settlement with Russia, a key-ally of Hungary’s current foreign policy objectives, while staying out of reach of the U.S. dollar’s hegemony.
“Gold is no one else’s liability”, GoldMoney head of research Alastair Macleod said, and that may be the major underlying reason for Poland and Hungary’s newly-found interest in gold. “There’s something almost dragon-like about these acquisitions-powerful entities secreting away piles of gleaming treasure, as their interest in international cooperation wanes”, highlighted Natasha Frost in Quartz, citing the well-documented appeal of the precious metal for authoritarian leaders and regimes throughout history. Not only does it provide financial stability, but political autonomy as well. Considering the timing, this should not be overlooked nor dismissed as a minor coincidence.