Central and Eastern European Banks Rush To Increase Gold Reserves

(June 13th, 2021 - Cristian Gherasim , Bucharest Correspondent)

Hungary tripled its gold reserves to a total of 95 tons, the largest per person in Eastern and Central Europe. Poland added over 200 tons of the precious metal to its national reserve over the course of two years, and even the Serbia’s Central Bank has been constantly increasing gold purchases over the past years.

The penchant for gold in Central and Eastern European nations has been on the rise. Hungary’s Central Bank Governor, a close associate of PM Viktor Orban said the move is intendent to stabilize the economy in the context of the COVID pandemic, increasing inflationary risks and inflating public debt. The country’s Central Bank even boasted on its website about having the highest gold reserves per capita in the CEE region.

The Hungarian central bank explained the dramatic purchase of gold bars, highlighting that gold has no credit risk and no counterparty risk, and so reinforces sovereign trust in all economic environments

Another country set on increasing its gold reserves is Poland. Governor Adam Glapinski, also close to the governing party, said that gold should reach 20% of the centrad l bank's reserves during his next term, as he launched his reelection bid.  Glapinski said that the institution he runs will buy at least 100 tones of gold in the coming years to demonstrate the country's economic strength.

Poland’s central bank bought 126 tons of gold in 2018 and 2019 and repatriated 100 tons from the Bank of England, doubling its reserves.

Repatriating gold reserves has also been used as part of a populist rhetoric, as it happened in 2019 in Romania, when the government in charge then tried unsuccessfully to move the country’s gold reserve from London to Bucharest.

Another gold hoarder, Serbia has also made headlines with its more gradual gold accumulation. "The key

driver behind these purchases was to shore up the stability of the Serbian financial system during a time of uncertainty and to guard against the heightened risk of a global crisis," The Foreign Investors Council in Serbia said, adding that the COVID-19 pandemic continues to be an important trigger for wanting more exposure to gold of Central and Eastern European central banks.

Over the past decade some countries in Eastern Europe have increased purchases of gold as a way to reduce reliance on other assets.

On the other hand, other European nations started the millennium by reducing their gold holdings. The Euro Area which also includes the reserves of the European Central Bank sold a total of 1,885.3 tonnes over the past two decades, reducing gold holdings by around 15%. Despite that Germany, Italy, and France still retain some of the largest gold reserves.

The European Central Bank believes that gold remains “an important element of global monetary reserves, as it continues to provide asset diversification benefits”. Its reserves have gradually increased over the past two decades.

Speaking to Cristian Paun, professor at the Bucharest University of Economic Studies and head of the Center for Research in International Economic Relations, gold reserves are intended to offer stability to a country’s currency and support its monetary policy.

Păun told EU Reporter that given the current policies of considerable liquidity poured into the market, gold remains attractive as a reserve asset for central banks to show credibility.

He explained to EU Reporter that some central banks are stockpiling on gold and others are not based on how they regard the role of gold in today’s economy. Another reason that might weigh in heavily deciding for or against gold is linked to the costs associated to the metal’s handling.

“Gold has an international liquidity problem. If you want to get rid of gold quickly, as a central bank, today you have only a few advantageous possibilities. Moreover, gold has its problems of storage, transport, handling and security. There are important costs that cannot be ignored and that not many central banks can afford”, Păun told EU Reporter.

Cristian Păun considers that gold reserves could also have a positive impact in holding off inflation in the EU through a system of pegging money supply to central banks gold reserves.

“Economic differences between euro and non-euro member states could grow due to rising inflation. As long as massive amounts of Euros are printed in the Eurozone, non-Euro countries could be impacted by this monetary expansion”, he told EU Reporter.

Yet, gold stockpiling could also signal internal political or economic instability, believes Armand Gosu, geopolitics expert on countries from the former soviet sphere of influence. He told EU Reporter that acquiring gold is rather a tendency that can be seen throughout the world in crisis situations.