Central bank Czech Republic wants to buy more gold and stocks

The central bank of the Czech Republic will add more gold and stocks to its reserves in the coming years. At least, that is the intention of Aleš Michl, the future governor of the central bank. In a interview With the Czech financial news site Ekonom, the 44-year-old Michl says that he wants to make more returns with the central bank's reserves. "It's better to have assets than a mountain of debt', said the central banker.

There is no lack of ambition, because the new central banker, who will start work from July, wants to increase the country's gold reserves tenfold. In doing so, he follows the example of countries such as Poland and Hungary, which have also bought significant amounts of gold in recent years. Poland doubled its gold reserves in 2019 to 228 tonnes, while Hungary doubled its gold reserves last year Tripled up to almost 95 tonnes. Michl also wants to include more shares in the central bank's reserves. From the interview:

"I will propose to increase the stake in equities from the current 16% to a level of 20% or more in the coming years. So do the central banks of Switzerland and Israel and large sovereign wealth funds such as Norway's. I will also suggest buying more gold, from 11 tons to 100 tons or more. This should be done gradually over the next few years. Gold is good for diversification because it has no correlation with equities."

Czech Republic to buy more gold

Michl has been with the central bank of the Czech Republic since December 2018. Since then, he has seen how several countries in the region have added gold to their reserves. And that worked out well, because the Gold price has increased significantly in recent years. Low interest rates have also made it much more attractive to hold precious metals as reserves instead of low-yielding government bonds. In addition, a gold stock has no counterparty risk and a low correlation with other investments.

The Czech Republic currently has a gold reserve of 10.9 tonnes, relatively low for a European country of 10.7 million inhabitants. In comparison, the Netherlands has a gold reserve of 612.5 tonnes out of a population of 17.4 million inhabitants. The central banks of Poland and Hungary also have much more precious metal per capita than the Czech Republic. Also relative to the total reserves, the share of gold is currently marginal at only 0.4%.

Gold market analyst Ronan Manly delved into the archives and Discovered that the Czech Republic sold a large part of its gold reserves in 1998. The central bank then dumped 54 tonnes on the market at a rock-bottom price, because the precious metal would no longer meet the central bank's liquidity needs. At the time, the gold price was around $300 per troy ounce. Now the central bank can buy it back again at a much higher rate of about $1,850 per troy ounce.

Inflation

In the interview with Ekonom, Michl said he does not plan to raise interest rates to fight high inflation. According to him, inflation is the result of supply-related factors, over which the central bank has no influence. "The Czech central bank should communicate this as an exception to the inflation target."

Michl expects inflation to peak at around 15% in July. After that, it will take another two years for inflation to return to its 2% target. His intention not to raise interest rates put pressure on the Czech koruna, as the market had previously anticipated a rate hike. The outgoing central banker Jiří Rusnok has raised interest rates since August last year Increased in an attempt to rein in inflation.

This contribution comes from Geotrendlines

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