In the following article, we will present the processes and most important trends of the gold market in recent years, and we will talk about the increase of the MNB’s gold reserves in several steps, which was later proven to have been realized at the best possible time.
The crises of the 2020s created an uncertain market environment. The global economic and capital market processes of recent years created a situation in which the role of the gold reserve became even more valuable. The world economy has overcome the biggest wave of global inflation in recent decades. The relatively calm 2010s, characterized by balance and growth, were shaken by crises in 2020.
At first, Covid and the government and central bank reactions to it moved the financial markets the most, and then, as the epidemic situation improved, geopolitical tensions intensified. As a result, inflation expectations and growth prospects have become uncertain. In addition, more and more geopolitical focal points have emerged and are emerging, the most important of which are: the US-China confrontation, the Russian-Ukrainian war, the Israeli-Palestinian conflict, the armed clashes in the Red Sea region, and most recently the armed conflict between Israel and Iran.
Gold is a symbol of trust, durability and stability, which is why it has often functioned historically as a means of refuge in times of crisis. From 2020 – starting from the outbreak of the Covid epidemic – but especially from February 2022, from the start of the Russian-Ukrainian war, global economic processes will be characterized by uncertainty, and international markets will be characterized by increasing volatility.
The key role of the gold reserve in times of crisis
Central bank gold reserves are the gold purchased by a country’s central bank and cover purchases in physical form.
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The shocks to the supply chains and the rising prices on the market of energy carriers increased inflation and also made inflation expectations more uncertain. In response to the rising inflationary environment, in recent years, central bank decision-makers worldwide have decided to tighten monetary conditions in order to break inflation and restore macroeconomic balance.
However, in the second half of 2023 – in parallel with the rate of price increases experienced in the dominant economies – the communication of the major central banks, including the Fed and the ECB, also changed. Currently, market participants are speculating when the first interest rate cuts may arrive, which means an additional factor of uncertainty in the financial markets.
Central banks around the world increase their gold reserves in a decade of uncertainty In recent years, in response to changes in the global economic environment, more and more countries have decided to once again assign a decisive role to the precious metal, which functions as a traditional reserve asset, and increase their gold reserves.
The central bank gold purchases, which will gain new momentum in 2021 and break decade-long records in 2022-2023, can primarily be linked to China, Turkey, India and Japan. However, in 2023, Poland also appeared on the market as a significant buyer, and the Czech Republic is also planning further purchases. The central banks’ gold demand rose in 2021 and 2022, reaching a historic high in 2022, when all purchases amounted to 1,082 tons.
Last year, although no new record was set (1,037 tons), purchases by central banks were only 4 percent short of the previous year’s historical peak. In the year 2023, the total global demand for gold was 4,899 tons, a new historical record. According to analysts and market participants, purchases by central banks have played a decisive role in the long-term rising exchange rate trend in recent years, and based on the data for the first quarter of 2024, this may continue. Looking back at the turbulent global economic and international capital market processes of recent years, the correctness of maintaining and significantly increasing the gold reserve has been confirmed in retrospect.
The MNB’s gold purchases: Hungary outpaced the world
The Magyar Nemzeti Bank has held gold reserves since its foundation in 1924. The stock of the gold reserve increased until the Second World War, and at the end of the war, the central bank evacuated around 30 tons of gold bars and gold coins to Spital am Pyhrn in Austria on the MNB’s legendary “Gold Train”. The exported gold reserve was fully returned to the country after the end of the war.
During the regime change, Hungary’s gold reserve was reduced in several stages from 46 tons to 3.1 tons, and the stock remained unchanged until 2018.
Breaking this trend, the Magyar Nemzeti Bank, on the basis of long-term national and economic strategic aspects, decided ahead of most countries already in 2018 to significantly increase its gold reserves, increasing its stock of 3.1 tons tenfold. After that, during the Covid epidemic, seeing that turbulent and uncertain times were coming, he further increased, this time tripling, Hungary’s gold reserves in order to further strengthen security and stability.
In 2021, this step meant the purchase of an additional 63 tons of gold, increasing the size of the Hungarian gold reserve to 94.5 tons. By expanding its gold reserves, the MNB was years ahead not only of the international trend, but also of the regional – Polish and Czech – central banks, which only announced their own purchase programs in 2023. The Poles bought 130 tons in 2023, and the Czech Republic aims to quintuple its gold reserves, within the framework of which the Czechs bought 19 tons of gold last year. Regardless of the Czech and Polish purchases, Hungary still holds the first place in the region in terms of gold reserves per capita.
The MNB keeps the gold reserve on the basis of national and economic strategic aspects, the stock of which has increased 30 times compared to the state before 2018, so now a significant gold reserve strengthens the stability of the country and the perception of our economy and financial system.
Author: Attila István Veres, Head of the Money and Foreign Exchange Market Directorate of the Hungarian National Bank.
