Wednesday, 12 Dec 2018
Business

Why was buying the central bank difficult to guess the gold market?

The gold market was taken by surprise when two of the largest economies in Eastern Europe, Poland and Hungary, made scarce purchases in recent months. Why central banks buy gold is often a major topic of market speculation. Have Poland and Hungary raised concerns about economic conditions? Did they reduce exposure to the dollar? Or maybe protect yourself from possible sanctions from the European Union?

1. Why do central banks have gold?

Mainly to diversify their reserves. Gold – a finite asset as opposed to a fiat currency – can help stabilize economies in times of market turbulence. Bullion has a historical appeal as a haven of peace and protection against inflation. And gold is negatively correlated with the dollar, which means that its value often rises when global demand for the US dollar falls. Gold holdings of central banks have jumped over the past decade, driven mainly by Russia, China and Kazakhstan, among other countries. Central banks now hold more than 33,000 tonnes of this metal, about one-fifth of all gold ever mined.

2. Why are the purchases from Poland and Hungary surprising?

These are the first major gold purchases by an EU country for more than 10 years. "The gold market was used to, and was still expecting, purchases by the central bank" from Asian countries and the former Soviet Union, "but purchases from EU members it was totally unexpected, "said Carsten Menke, commodity analyst at Julius Baer & Co. in Zurich. Coincidentally or not, Poland and Hungary are also the two countries that are confusing the European liberal order. Both are run by populists who have exploited a rich source of frustration among those who feel left behind by the post-communist transformation and the economic system that provoked the 2008 global financial crisis.

3. What speculations did Poland and Hungary trigger?

It was said that the two countries were trying to "prepare for a potential currency crisis" if global inflation increased; to prepare in case Russia begins to settle transactions with gold; or to assert their independence vis-à-vis the Brussels-based EU leadership. Some analysts have said that both countries may want to protect themselves against the uncertainties of possible sanctions by the European Parliament. Others have pointed to attempts by some countries to move away from the dollar-denominated financial system. Russia, for example, a major buyer of gold, has reduced its holdings in US dollars this year.

4. What are the reasons given by Poland and Hungary?

The governor of the Hungarian central bank, Gyorgy Matolcsy, said the 10-fold increase in gold holdings in October was a way to make the nation's wealth safer. It has also helped to align the share of gold in its reserves with that of other countries in the region. Poland declined to comment on its purchases, but some analysts said the recent drop in gold to the lows for more than a year had helped make the metal more attractive.

5. Will it be a trend in Eastern Europe?

It is too early to say, but countries with relatively small assets may be more likely to buy. For example, bullion accounts for about 4% of Hungarian and Polish reserves, compared with at least 58% for Germany, Italy and France. According to Julius Baer, ​​emerging market countries – especially regular buyers – will likely continue to be added. Ukraine has reduced its holdings by more than 40% compared to its 2014 peak. That countries like Romania, the Czech Republic and Lithuania do the same with purchases still to guess.

6. Will these purchases affect prices?

Although Poland and Hungary continue to buy, they are unlikely to have a significant impact on prices. So far, their purchases are still modest compared to Russia's additions this year and central banks may account for less than 10% of total gold demand. More than the amount of purchases, the incursions of Poland and Hungary into gold may be of more interest to the market for what they report about the role of bullion in the monetary system. The metal also tends to react less to variations in supply and demand than other commodities, often acting more like a currency and an echo chamber for concerns about the economy. .

7. Will the other central banks continue to buy?

Analysts expect global gold reserves to continue to grow, although their pace has slowed in recent years. Central banks will probably buy about 350 tonnes of gold this year and 300 tonnes in 2019, according to JPMorgan Chase & Co.

To contact the reporter about this story: Rupert Rowling in London at rrowling@bloomberg.net

To contact the makers of this story: Lynn Thomasson at lthomasson@bloomberg.net, Nicholas Larkin, Laurence Arnold

© 2018 Bloomberg L.P.

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