In 2020–2022, central banks brought 1,097 tonnes of gold. This year, the figure could be even higher. Over the last year, more than 100 tonnes have been added to their vaults every quarter.
A Cure for Uncertainty
Why does gold have an increasing share of reserves? Some insight on this question is provided, among other things, by a survey conducted between February and April this year by the World Gold Council (WGC) in conjunction with market research company YouGov among central bankers buying gold and who cooperate with the WGC. The survey among representatives from as many as 59 central banks around the world shows that the main factors considered in reserve allocation decisions are interest rates (97 per cent of responses), inflationary concerns (83 per cent) and geopolitical instability (59 per cent). Participants in the survey, which has been going on for six years, only mentioned the last two items in the 2022 and 2023 editions, which the authors of the study attribute to fallout from Russia’s aggression against Ukraine in February 2022.
Gold is considered a good investment for uncertain times because its value is not dependent on either the fiscal or monetary policies of any country. Its relative stability, and its reputation as a safe haven, is primarily determined by its steady or slowly growing supply. Between 2016 and 2022, annual production was in the range of 3,500 to 3,600 tonnes.
In the quoted survey, more than 70 per cent of respondents felt that central banks would increase gold stocks in the next 12 months, while 24 per cent declared that it will buy gold.
Following the outbreak of a global pandemic in 2020, there was a sharp increase in the percentage of central bankers declaring gold purchases. In each of the four consecutive surveys, at least 20 per cent of survey participants declared that they would increase their bullion stocks. In 2019, this answer was given by only 8 per cent of those surveyed. The proportion of institutions reporting they were selling gold also dropped sharply. Between 15 and 20 per cent of central banks surveyed in 2019–2020 said this. However, in the last two surveys this had fallen to less than 5 per cent.
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The Financial Times pointed out another possible motivation prompting central banks to buy gold. Among the many sanctions imposed on Russia following its full-scale invasion of Ukraine was the freezing of roughly half of the Russian central bank’s USD 300 billion in reserves. Gold reserves were not directly affected by the sanctions, as these were held in Russia. As John Reade, chief strategist at the WGC, noted, some countries have found that “having gold outside the control of anyone else is useful in situations where access to other reserves may not be possible”.
NBP Is Buying
Narodowy Bank Polski has been one of the more active buyers of gold in recent years. Back in 2017, it owned 103 tonnes of gold, which accounted for around 4 per cent of official reserve assets. At the end of 2022, it was already almost 229 tonnes, representing 8 per cent of reserves. Also this year, by the end of August, our central bank had added 85.7 tonnes of bullion to its reserves, which puts our country among the leaders in terms of purchases.
In the ranking of gold held by central banks drawn up systematically by the World Gold Council, Poland occupied 23rd place. At the end of August 2023, NBP’s reserves held in gold amounted to 314.4 tonnes. At the end of September, bullion was valued at USD 20.1 billion, or PLN 87.8 billion, and represented over 11 per cent. Poland advanced in the global ranking.
“NBP considers gold to be a particularly important component of its official reserve assets. The characteristics of gold make bullion very well suited to the prudential function of holding foreign exchange reserves and accumulating capital in the long term, withstanding periods of stress and facing volatile market conditions”, is how NBP Governor Adam Glapiński justified gold investment, in an interview with cfi.co magazine in 2021. As he argued, “gold offers unique investment qualities – it is free of credit risk, its value does not fall under the influence of a country’s misguided monetary or fiscal policies, and although its overall supply is limited, its physical properties guarantee its durability and indestructibility. For all these reasons, gold is considered the best strategic financial hedge”.
When in May 2022 Professor Adam Glapiński was appointed for a second term as Governor of NBP, he pledged to increase the stock of gold in the foreign exchange reserves by 100 tonnes. The purchases made in 2023 are a fulfilment of that promise.
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A Counterweight to the Dollar
From the point of view of investors with a long-term perspective, such as central banks, an important feature of gold is its low correlation with other asset classes. First of all, gold generally moves in the opposite direction to the US dollar, which is the main reserve currency of central banks. However, its share has been declining over the past few years and has been below 60 per cent recently. Central banks themselves also estimate that the dollar’s share of reserves will decline in the coming years. Some of the space freed up by the dollar is likely to be filled by gold.
“NBP, as a public investor, differs from a typical asset manager in that it maintains a broad investment portfolio, attaching the greatest importance not to maximising returns but to preserving the liquidity and safety of its assets. The principle is simple: if foreign exchange reserves are not used to counter extraordinary threats to financial stability or the balance of payments, they should be stored, and preferably multiplied and passed on to future generations”, Adam Glapiński said for cfi.co.