In April, Hungary accelerated its gold buying policy, tripling its reserves. The situation in Hungary is not an exception, but rather reinforces the rule. In recent years, national banks in Central and Eastern Europe (CEE) have bought gold regularly.
Such behavior seems paradoxical, because for half a century money around the world has been fiat, not backed by gold. So here we will look at why banks buy gold.
The increase in gold reserves in the CEE
In recent years, no country in the CEE region has reduced its gold reserves. Even in the rare cases where temporary sales are seen, they occur because of the current economic situation. The strategy of all countries, including Romania, is to increase gold reserves.
However, there are significant differences between the quantities purchased by CEE countries. And let’s not forget that this graph shows us the situation until the end of 2020, and governments have continued the policy of increasing reserves, with further changes to come at the national level.
Hungary – fastest growing gold reserves
In April 2021, the Central Bank of Hungary (pictured) made a very bold move and bought 63 tons of gold, bringing its reserves to 94.5 tons, a record in the country’s history.
But the policy of increasing gold reserves does not date from today, from yesterday. In the last quarter of 2018, this type of transaction grew at an even faster pace – in just three months it saw a 10-fold increase. In the same year, the central bank repatriated its existing reserves and instead of storing them in a vault in London, they are stored in Hungary itself.
In this context, Hungary has become a leader in terms of the speed with which it increases its gold reserves, not only at the European level, but also globally.
Poland, sudden increase in gold reserves
In 2019, the National Bank of Poland started a similar policy, buying 100 tons of gold in just 6 months. Thus, it almost doubled its reserves, which reached an all-time high of about 240 tons.
Despite the slight drop in the price of gold that preceded this move, Poland will continue this trend. In an interview at the end of March, the governor of the central bank, Adam Glapinski, announced that in the coming years, Poland will buy at least 100 more tons. At current prices, Poland will spend about $5.5 billion.
Serbia – the record holder in the Balkan Peninsula
According to official data from the National Bank of Serbia, in 1999 its reserves were close to zero. Afterwards, Serbia started buying gold, but there were also times (2002 and 2006) when it sold. In general, the neighboring country has maintained its position as a net buyer of gold, regardless of its price. After buying 10.2 tons in 2019 and another 5 tons last year, Serbia now has reserves of more than 32 tons, practically leading the Balkan Peninsula.
Since the beginning of 2021, due to the slight depreciation of the precious metal in monetary terms, Serbia’s gold reserves have depreciated slightly. But according to the World Gold Council and the National Bank, Serbia continues to buy and gained 0.1 tonnes each in the first two months of the year.
Turkey’s uncontrollable inflation
Turkey is the absolute leader when it comes to gold reserves (about 700 tons), with the Central Bank buying gold directly from the profile markets since 2017. With the highest inflation as well, it becomes even clearer why the precious metal plays a such an important role in Turkey’s economy, actually being the savior of the Turkish lira from a total fiasco. In the period from 2017 to 2020, Turkey was always on the top of the list of the biggest buyers of gold in the world, last year being even on the 1st place.
If we analyze the monthly statistics, from November 2020 until now, Turkey is the only gold seller in the region. Has he changed his policy in the long run? The answer is no. The reasons are related to the colossal inflation in Turkey and the gold shortage in 2020 due to the closure of refineries and precious metals markets. To balance the market and stop the Turks’ further gold rush, the central bank started selling. Another reason is related to the collapse of the Central Bank of Turkey’s reserves in convertible currency. At some point these reserves became menacingly thin, and the country simply began selling large amounts of gold.
Despite the diminishing role of gold in 1971, many bankers still see it as a symbol of the security and stability of monetary systems. At the same time, there are many voices, especially in Central and Eastern Europe, talking about how banknotes undermine the policies of institutions such as the European Central Bank and the Federal Reserve.
Therefore, we should not be surprised that in 2018 and 2019 central banks recorded record purchases of gold – 656 tons and 669 tons, respectively.