Looking back at the surprising gold purchases of the National Bank of Poland (NBP) in the previous year, which from April until now, total approximately 130 tons, one might wonder why we’re buying so much and where the limits to these purchases lie. If we look at our entire gold reserves, they are currently estimated at about 358.7 tons. Regarding all reserve assets, gold’s share is approximately 12.6%. Is this level sufficient? Are announcements of additional purchases justified?
Why do we need gold?
It’s worth knowing that monetary gold is an ideal element to diversify reserve structure. In the long term, it preserves its purchasing power and when kept under personal control, it is risk-free. It also has very high liquidating power as it can be converted into any currency almost immediately. Demand for gold exists globally, so undoubtedly, having it increases our security level.
Monetary gold, which has been with us for thousands of years, has proven ability to retain purchasing power and is perceived as an element that ups the stature of a given nation in the eyes of global investors, unlike fiduciary money.
In one of the recent interviews, the NBP President, Professor Adam Glapinski, pointed out that he’d like gold to constitute 20% of total reserves, as it’s currently about 12.6%. Assuming that the value of foreign reserves and the gold price won’t change significantly, Poland would need about 570 tons of gold in its reserves, compared to the current 358.7 tons.
Interestingly, if we consider the 50 countries with the largest gold reserves and relate them to the total reserves, the average is about 23%. This is very close to the share of gold in the reserves that the NBP is aiming for.
Meanwhile, factoring in all global central banks, the average share of gold reserves in relation to total reserves hovers around 15%. It’s worth noting that in the early 80s, a decade after President Nixon ended the gold standard, this share exceeded 70%. The historical average over these more than five decades is around 40%.
Aligning gold reserves with GDP in Europe
In recent years, Jan Nieuwenhuijs, a Dutch analyst from Gainsville Coins, has made some fascinating observations about the gold accumulated by central banks. He put forward the concept of using gold held by central banks in the Eurozone to write off treasury bonds accumulated in their balance sheets. This write-off could take place by adjusting the price of gold to a sufficiently high level, with the gain from such a readjustment then covering the debt – Tomasz Gessner, the Chief Analyst at Tavex, points out. For this to take place in a coordinated (most likely at the level of the Bank for International Settlements in Basel, also known as the central bank’s bank), all countries would have to balance their reserves. This is tied to each country having a different average purchase price of gold, a different quantity, and a different value of government bonds on their balance sheet – he adds.
Some Eurozone countries (e.g., the Netherlands) openly admit that they adjust the size of gold reserves not so much in relation to their total reserve assets, or the European average in this respect, but in relation to their economy’s size, i.e., GDP. The Dutch Central Bank has gold worth about 4% of GDP, similar to France, Italy, and Germany. If Poland, still not a Eurozone member, were to go in a similar direction, we should have about 450 tons of gold.
Based on the central banks’ average share of gold in reserves, statements from the NBP president, or speculations about aligning reserves with GDP in the Eurozone, one can cautiously assume that the NBP gold reserves might eventually fall within the 450-570 ton range.
