Bullion Bulletin: Central European banks get more gold

A new governor and an old policy.

The 44 year-old Aleš Michl, who will take over as governor of the Czech National Bank in July, plans to increase the bank’s gold holdings almost tenfold, from the current 11 tonnes to around 100 tonnes, “gradually, over several years”. He says, “gold is good for diversification, it has zero correlation with stocks”.

The Czech Republic, or Czechia as it now is officially, joined the European Union in 2004 but, like Bulgaria, Croatia, Denmark, Hungary, Poland, Romania, and Sweden it has not adopted the Euro, even though more than half its trade is with Eurozone countries. Only a third of the population reportedly favours ditching the national currency, the Koruna, for the Euro. Earlier this year, a survey found private holdings of gold in Czechia amounted to more than 19 tonnes.

Czechia’s central bank is thus following a path trod by the Hungarian central bank – which revealed it had raised its gold holdings by 10 times, to 31.5 tonnes, in October 2018 – and Poland’s central bank, which bought 125.7 tonnes during 2018-19.

This gold buying by central banks doesn’t have an immediate effect on the spot price of gold – that price is established via bullion bank trading on the paper markets. But it does play a supportive role, indicating that governments and central bankers in the current deeply uncertain environment are looking to diversify their reserves into gold and, in the words of Michl, to better “mitigate the effects of disasters…”

Inflation in Czechia is now running at more than 14% a year, against average Eurozone inflation of about 8%. The country’s central bank has raised its main interest rate to 5.75% in the past year and looks likely to push it even higher when it next meets on 22 June.

Czechia gold reserves

Michl is supposedly reluctant to put up interest rates, which has raised a few eyebrows locally; he seems to share the view of Turkey’s President Recep Tayyip Erdoğan, who despite Turkey’s inflation now at more than 73% regards low interest rates as the key to combatting runaway inflation. Michl said at his appointment ceremony: “I will propose the stability of interest rates for a certain period of time… I expect inflation to continue at record highs of around 15%. My main objective will be to bring it back to 2%. I expect it will take two years”. In an interview with a local weekly he said: “Supply-side inflation will fly through the economy and nobody in the world can do anything about it… The key is to prevent it becoming demand-side inflation”.

There are some suggestions that Michl’s reluctance to raise interest rates results from his advisory role to populist former premier Andrej Babis, whose fertilizer trading company, Agrofert, is not keen on higher interest rates as that would increase Agrofert’s costs.

Babis has said that Michl belongs to the “sensible wing” of the bank board and added: “I’ve been saying for a long time that the CNB [Czech National Bank] is making policies that are harmful to the economy, harmful to people and harmful to mortgages. Basically, the more the central bank raises rates, the higher the inflation”. Which, despite considerable historical evidence to the contrary, might of course turn out to be true; as pigs might one day fly.