The gold market was caught by surprise when two of eastern Europe’s biggest economies, Poland and Hungary, made rare purchases in recent months. Why central banks buy gold is often a major topic of market speculation. Were Poland and Hungary signaling worries about economic conditions? Were they cutting exposure to the dollar? Or maybe hedging against potential European Union sanctions?

1. Why do central banks own gold?

Mainly to diversify their reserves. Gold -- a finite asset as opposed to a fiat currency -- can help stabilize economies amid times of market turmoil. Bullion has a time-honored appeal as a haven and hedge against inflation. And gold has a negative correlation with the dollar, which means its value often rises when there’s a dip in global demand for the U.S. currency. Central bank holdings of gold have jumped in the past decade, driven mainly by Russia, China and Kazakhstan, among other countries. Central banks now hold more than 33,000 metric tons of the metal, about a fifth of all the gold ever mined.

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

They’re the first substantial gold purchases by any EU nation in more than a decade. “The gold market was used to, and expected further, central bank buying” by countries in Asia and the former Soviet Union, “but purchases from EU members, that was totally unexpected,” said Carsten Menke, a commodity analyst at Julius Baer & Co. in Zurich. Whether coincidence or not, Poland and Hungary also happen to be the two countries currently rattling Europe’s liberal order. Both are led by populists who have tapped into a rich vein of frustration among people who feel left behind by the post-communist transformation and by the economic system that produced the 2008 global financial crisis.

3. What speculation did Poland and Hungary trigger?


There was talk that the two nations were trying to “brace for a potential currency crisis” should global inflation pick up; preparing themselves in case Russia starts settling trades with gold; or asserting their independence from the Brussels-based leadership of the EU. Some analysts said the two nations may want to hedge against the uncertainty of possible sanctions from the European Parliament. Others pointed to moves by some nations to shift away from the dollar-denominated financial system. Russia, for instance, a major gold buyer, has slashed holdings of the greenback this year.

4. What reasons did Poland and Hungary give?

Hungary’s central bank governor, Gyorgy Matolcsy, said boosting gold holdings 10-fold in October was a way to make the nation’s wealth safer. It also helped bring the share of gold in its reserves in line with other nations in the region. While Poland declined to comment on its purchases, some analysts said gold’s recent drop to the lowest in more than a year helped make the metal more attractive.

5. Will this be a trend in Eastern Europe?

It’s too early to say, but nations with relatively low holdings may be more likely to buy. For example, bullion makes up about 4 percent of Hungarian and Polish reserves, compared with at least 58 percent for Germany, Italy and France. Emerging-market countries -- particularly regular buyers -- are most likely to keep adding, according to Julius Baer. Ukraine has cut holdings by more than 40 percent from a peak in 2014. Whether countries like Romania, the Czech Republic, and Lithuania follow suit with purchases is still anyone’s guess.


6. Will these purchases affect prices?

Even if Poland and Hungary keep buying, they’re unlikely to have much price impact. Their purchases so far are still small compared with Russia’s additions this year, and central banks globally account for maybe less than 10 percent of overall gold demand. More so than the amount of the purchases, the forays by Poland and Hungary into gold are perhaps more interesting to the market for what they signal about bullion’s role in the monetary system. The metal also tends to react to changes in supply and demand less than other commodities, often acting more like a currency and an echo chamber for anxieties about the economy.

7. Will other central banks keep buying?

Analysts expect global gold reserves to keep growing, even if the pace has slowed in recent years. Central banks will probably buy about 350 tons of gold this year and another 300 tons in 2019, according to JPMorgan Chase & Co.

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

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net, Nicholas Larkin, Laurence Arnold

©2018 Bloomberg L.P.