He intends to invest extensively in gold in this way, because according to him, the development of the price of the precious metal has zero relation to the development of stock prices. The new governor also wants to increase the share of shares in foreign exchange reserves.
At the end of June this year, the CNB had 360,000 troy ounces of gold at its disposal. This corresponds to roughly 11.2 tonnes. Therefore, if the central bank, as the governor intends, would increase its gold reserves roughly tenfold, they can amount to 110 to 120 tons. The central bank would thus own more than 100 tons more of the metal than it does now. The Czechia would thus have sovereignly the largest volume of gold in history.
At the end of the socialist era, in August 1989, the then State Bank of Czechoslovakia had a total of 119 tons of gold. After the breakup of Czechoslovakia, the Czech Republic had approximately 65 tons of metal at its disposal. However, between 1997 and 1999, the CNB got rid of a substantial part of the gold. Out of 65 tons of metal, she had less than 14 tons left in the reserves.
Since then, the volume of the CNB’s gold reserves continued to decrease, until May 2020, when it decreased to less than eight tons. Since then, however, the CNB has been gradually buying up gold, in the range of overall lower units of tons. If the CNB were to expand the “Czech golden treasure” by roughly 100 tons, it would be a groundbreaking step. Moreover, quite bold.
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Not all central banks of economically developed countries have gold in reserves. For example, Norway or Canada have no gold. For example, Norway clearly prefers stocks. Czech foreign exchange reserves are still one of the largest in the world in relation to gross domestic product (GDP), so diversifying a significant part of them into gold may make sense.
Over the past ten years, gold has appreciated by 12.7 percent in terms of the dollar in which it is traded in the world, an annual average of 1.2 percent. After conversion into crowns, it saw an appreciation of seventeen percent, an annual average of 1.6 percent. With average annual inflation in the Czech Republic between 2012 and 2021 of 2.1 percent, this means that gold did not represent the proverbial protection against inflation.
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Standard stock investing has protected against the effects of inflation much better than gold over the past decade. For example, those who invested in the main index of the Copenhagen stock exchange ten years ago, even with dividends, gained more than 400 percent appreciation at the end of last year after conversion into crowns. The Bucharest Stock Exchange has yielded roughly 370 percent in crowns during that time, including dividends.
Those who invested in accordance with the main index of American shares, the Standard & Poor’s 500, had almost 370 percent more with dividends in crowns at the end of the year last year. The main index of the Prague Stock Exchange, PX, has yielded roughly 150 percent over the past ten years, including dividends. According to Eurostat, Czech real estate appreciated by roughly one hundred percent between 2010 and 2021.
The author is Trinity Bank’s Chief Economist and a member of the Government’s National Economic Council (NERV)
(Editorially modified)
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