Policies of National Bank of Poland in the time of peril

In gold they trust

Polish central bank – Narodowy Bank Polski (National Bank of Poland, NBP) – remained one of the most prominent gold buyers among such entities in recent years. De facto, it remains biggest gold buyer of the western world. According to most recent statistics, it holds in total astounding 427 t. of yellow metal as per 7th of November 2024. Data published indicates that its gold reserves rose by a further 7 t. in October, making YTD net purchases at total 68 t. Just in 2023 alone NBP added to its reserves 130 t. And between 2018-2023 NBP added 256 t. in total. Prior this period, NBP held 102.9 t.

Gold constitutes an important part of our official reserve assets. It diversifies the risk of other investments and increases yields, especially during crises and episodes of heightened market tensions

Compound purchases, along with previously owned bars, made gold accountable for approx. 18% of Poland’s total reserves. But NBP, didn’t say final word on the matter. Since many years, Governor of National Bank of Poland – Mr. Adam Glapinski kept repeating mantra, on his intention to make gold at 20% of Poland’s official reserve holdings, while NBP Management Board kept approving further purchases to be made since 2018.

Yellow metal is already second largest part of the NBP's foreign exchange reserves (USD is first, EUR third), which also reflects trend in the structure of global foreign exchange reserves (more on that in our analysis ‘Has gold just surpassed Euro as central banking asset?). And as per 2023 NBP’s annual report further compound purchases elevating volume were and are to be expected.

Such pace made Poland one of the biggest holders of yellow metal in the world. Impressive move for a country that doesn’t mine gold in substantial volumes, never been colonial superpower, and didn’t control monetary system – as it is one or another case for top gold holding countries.

---

Of course, as it happens to be in politically bipolarized countries, even such moves couldn’t be left without certain criticism from political opponents. Hanna Gronkiewicz-Waltz – former President of National Bank of Poland between 1992-2000, commented on X (formerly Twitter):

And if we are buying, this means someone is selling, why are they doing it? There are several other questions, i.e. in the event of a crisis, which is easier to sell currency or gold?

Truly interesting comment from someone responsible for purchase of 74.5 t. in 1998, added to approx. 25 t. of leftovers held abroad and domestically - effect of compound and long-term sales made by communist governments prior to 1989.

OK. But owning gold is not some ‘popularity contest’ of who owns the most. It is part of asset building, security and diversification policy. And so, at the end of financial year 2023, official assets held by NBP stood at 194 bln USD / 763 bln PLN. And that is all of them – cash, treasuries, SDR, gold, ETF shares etc. At a time, gold was at 358.7 t., constituting 12.3% of overall assets. Which would be 93.6 bln PLN. Of course, value of assets fluctuates - i.e. market value of treasury papers deteriorates in comparison to its face value on sharply increasing yield. Currencies are subject of constantly fluctuating fx rates, although issuing entities usually aim to preserve certain level of interventionism and fx stability within assumed range. And so, it was in case of yellow metal – increase on price of gold, made NBP’s ‘gold and gold receivables’ made an increase of 34.9 bln PLN in value for 2023. Of course for 2023, NBP accounted loss of 20.8 bln PLN, but for multiple reasons, this is general trend among central banks around the globe.

---

But it’s not over, as we also have to consider an increase on gold price from 2000-2100 USD levels – as per end of 2023 - to 2600-2800 USD levels - as per October – November 2024. Which means ‘gold receivables and gold’ yet again made sharp increase in value of NBP assets in 2024. Assuming 32150 troy ounces in 1 t., at a current price of 11k PLN per ounce, 427 t. held by NBP, equal 153 bln PLN out of overall 862.5 bln PLN as per end of October 2024. This is 17.7% of entire reserve assets.

Assuming no changes on any asset values, and just increase on tonnage of monetary gold holdings (hence gold value but also total asset value as well) to 500 t., at the same price threshold as gold is now, NBP would have total assets at 887 bln PLN and gold at 177 bln PLN. This would allow institution to achieve long-term targeted 20% and in assumed conditions means not 600 t. – as per 2023 NBP’s estimations but 500 t. of gold. Of course, in the real world there are variables on assets held to consider, which on this occasion we didn’t. So realistically, assuming trend-wise continuation this would have to be more within range of 470-500 t.

---

Which brings question of where does NBP keeps whole polish tonnage? We don’t have a detailed information on allocation between locations. In our past analysis ‘Everything you’d like to know about gold in Poland, but are afraid to ask, p. 2.’, published in July 2023 we wrote:

It appears that 104.9 t. are being kept in Poland with remaining 123.8 t. being kept in London.

Above was based on press releases regarding to volumes held at a time. Although while we were writing that, NBP was already making further purchases, so info on general volume and split as above quickly became outdated. Based on NBP press statements, and general remarks by Mr. Glapinski, we have reasons to believe further diversification had occurred since. Problem is, without detailed statement from NBP officials, size of allocations is being speculative:

• Further volumes had been brought back to Poland and allocated between existing NBP local branches. This effectively works as a reassuring pile of cash stored under the mattress. Bear in mind, Poland lacks something in form of central treasury vault. Discussions on creating such were held in Poland in the past but had been abandoned as gold was being nearly fully used on LBMA. As per end of 2023 this was 27.4 bln PLN of total 93.6 bln PLN.

• Majority of Poland’s gold is continued to be held in London, in BoE vaults, stored on allocated accounts. That means, those where NBP has full rights to this particular volume with those particular reference numbers. Bear in mind that London is most liquid precious metals market in the world. Volume is being subject of collaterals and swaps, effectively generating profit. As per end of 2023 this was 66.2 bln PLN of total 93.6 PLN in gold.

• Based on previous declarations of Mr. Glapinski and early 2024 press information - certain volume had furthermore been transferred to USA as a part of diversification strategy. This would most likely be stored in Federal Reserve in New York, and probably acts on similar basis as volumes kept in capital of UK.

All of polish gold seem to be in LBMA standard of 400 troy ounces (12.44 kg), which enables quick disposal on liquid markets, as it is most popular standard, as we explained extensively in our ‘LBMA accreditation - facts, not myths’ analysis.

Are polish coffins heavy?

Gold constitutes 17.7% of polish reserves, although it is second sizeable part. But what’s with the rest of assets? And are they adequate to the size of polish economy?

Since 2000, after period of painful economic transformation and resolving heavy burden of looming default and indebtedness, pace of accumulation of the NBP's foreign exchange reserves has remained in line with the global trend. However, main sources of this accumulation were different from those typical for most emerging economies. In case of Poland, successive increase in the value of reserves resulted not from currency interventions, but primarily from the positive balance of external flows, largely originating from the inflow of funds from the European Union.

In January 2004, Ministry of Finance and the NBP signed an Agreement on the sale and purchase of foreign currencies for the service of foreign liabilities and receivables of the State Treasury and the principles of implementing this service. According to data from the Ministry of Finance, net value of inflows from the EU in the years 2004–2021 amounted to 143.4 bln EUR (178 bln USD). A significant part of these funds was converted into PLN by the NBP, thus increasing the level of foreign exchange reserves. In addition, these had been topped up because of investments made by NBP.

This resulted in increase of polish foreign exchange reserves to equivalent of 193.8 bln USD nowadays, compared to the 27.5 bln USD in 2000. In 2023, Amount of NBP's foreign exchange reserves corresponds now to almost 24% of Poland's GDP. In addition, the number of reserves ensures maintaining the appropriate level of commonly used reserve adequacy indicators, reflecting primarily the potential needs of the balance of payments in critical situations.

---

There are two most indicative approaches:

Size of NBP's foreign reserves can be analyzed through comparison versus import value. In relation to the this, NBP's foreign reserves remained at a level that not only guaranteed coverage of the reference value of three months of imports, but also remained at a higher level and in 2023 corresponded to the equivalent of liabilities for 5.1 months of imports.

Other measure is the adequacy of foreign reserves in relation to short-term foreign debt – this is how IMF and other entities act. NBP reserves were significantly above the reference value of 100% and amounted to 145.9% in 2016, 135.4% in 2017, 139.6% in 2018, 140.6% in 2019, 156.4% in 2020, 161.3% in 2021 and 149% in 2022, respectively.

And in the case of the adequacy measure relating the size of foreign reserves to the M2 money aggregate, the official reserve assets of NBP were also significantly above the reference value of 20% and in 2023 corresponded to 33.6% of the M2 aggregate.

Wygląda na to że w porównaniu do gospodarki, ilość rezerw zgromadzonych jest na lepszym niż adekwatny poziom. W szczególności jeżeli wziąć pod uwagę ciągłą rotację, NBP bowiem – jak każdy bank centralny – działa jako jednostka rozliczeniowa handlu zagranicznego państwa.

Global surroundings for commitment to yellow metal

According to Article 52, Section 1 of the Act on the National Bank of Poland, central bank accumulates and manages foreign exchange reserves, and undertakes activities aimed at ensuring the security of foreign exchange turnover and the country's payment liquidity. In Poland, a floating exchange rate system has been in force since 2000, and monetary policy is conducted within the framework of the inflation targeting strategy. In these conditions, foreign exchange reserves serve primarily to strengthen the country's financial credibility, thereby contributing to reducing the cost of financing on global markets and the volatility of the polish zloty (PLN) exchange rate.

In its policies, apart from referring to historical aspects of gold being part of monetary system, NBP identify increased need for gold among developing economies. Of course, reasons for such are diverse and have economic and non-economic factors supporting the case. We have covered them extensively in our ‘Has gold just surpassed Euro as central banking asset?’ and ‘Gold in concept of common BRICS currency p. 1’ analyses, among many. Effectively we discuss here extensive liquidity needs and general trust or lack of such (in gold, dollar based monetary system, US economical capability and political leadership).

But NBP also emphasize thesis, that tendency to increase gold reserves among many central banks of emerging economies could’ve also been an effect of the quantitative easing policies implemented by most important central banks last decade, and related long-term maintenance of negative real interest rates. These were being concerned as alarming, potentially causing an increase in inflation.

Negative real interest rates of past decade had reduced alternative cost of maintaining foreign exchange reserves in gold. Unprecedented increase in global foreign exchange reserves – mainly reserves in convertible currencies – created need for further diversification. And such effectively became a choice between US treasuries and others. With deteriorating fiscal position of United States, tendency occurred to dilute share of USD/UST among assets and diversify towards other, alternative. Increasing gold resources was also becoming an increasingly important element of diversification of official reserve assets.

Of course, need to emphasize on this occasion – US dollar in form of greenback or treasury papers absolutely dominates global landscape, being responsible for 6.6 trl of total allocated and unallocated global reserves which are at approx. 12.3 trl USD as per Q2 2024. That is over 50% of allocations. So voices on ‘USD imminent collapse’ are… exaggerated the least.

---

Change in attitude of central banks to gold purchases were also related to the strategic role of gold in foreign exchange reserves. NBP emphasize on how gold guarantees central banks preservation of reserve value in the long term. Moreover, in periods of crisis, price of the metal usually increases, leading to an increase in the value of gold resources held by central banks. This is as we emphasized in chapter one of this analysis. And please don’t get us wrong in here, but since 2020, world seems to be plagued by series of economical and geopolitical disasters, to be put on top of many past years of quantitative easing.

Motives for gold accumulation gold are increasingly related to geopolitical conditions. A strong increase in geopolitical risk occurred in connection with the wars in Syria, Ukraine and the Middle East but is also related to the growing tensions between United States and Russia-China (Dragon-Bear). Symptoms of deglobalization and fragmentation of the economy and the emergence of a clear division into political and economic blocs have also become visible.

Of particular importance here is the increase in the number and scope of financial sanctions applied by the United States and its allies since the beginning of the 21st century. Russia is just one of the cases, Iran and Venezuela are other well documented cases, but global East and South clearly understood that dollar became United States’ “financial weapon” (aka dollar’s weaponization) and an instrument for pursuing the country’s geopolitical interests. Being within predominant US dollar and Euro scope, NBP understands that application of sanctions reduces attractiveness of dollar as an international currency, because of sanctions, USD loses one of the basic features of a global unofficial currency - namely unrestricted access to it.

---

Possibility of freezing official reserve assets of central banks and the risk of their confiscation, sends strong signal and encourage central banks to protect themselves against such risks, among other things by increasing share of non-US made assets. With decline of Euro’s global position (as we described in ‘Gold in concept of common BRICS currency’, risks related to Chinese Yuan Renminbi, general trend on rate cuts which weakens currencies, there are not many alternatives. And with existing inflationary pressures, along with high fiscal misbalance of developed nations, debt issuance in form of bonds, treasuries etc. is being pressured by long-term sharp yield increase. Getting interests on assets of course allows to make profit, but there are two risks associated on that

• Further issuances may occur, and these may be with even higher yield,

• Holder is being affected by loss or gain of market value of foreign treasuries he holds. It doesn’t just matter that face value is i.e. 100 USD. This bears meaning upon purchase and maturity. But if in between these two points, central bank is in need to liquify some of foreign bonds it holds, has to consider market liquidity (US treasury papers is not case in here) and what counterparts are willing to pay for an asset.

Hence NBP emphasizes need for gold in foreign exchange reserves. In current market conditions its price delivers gains, and liquidity is not an issue. Hence deposits in vaults of gold trading centers like LBMA, where volumes can ‘work’ extra profits. However, in the event of sanctions being imposed or central bank reserves being frozen, gold can only be an effective safeguard if the precious metal is held in national vaults.

It seems, in comparison to economy, level of reserves seems to be more than adequate. Especially if consider constant rotation, as NBP – as other central banks – acts as ‘accountant’ for country’s international trade.

Heavy is the crown

In addition to above reasons for the increase in demand for gold by central banks of emerging economies, there are some unique features that NBP believes need to be emphasized. These are universal and timeless in nature, which distinguish precious metal from other components of official reserve assets. This also results from its physical form and durability and sturdiness (gold does not corrode).

Gold reserves are free of credit risk related to the insolvency of the issuer. Furthermore, there is no currency risk. Unlike debt securities denominated in foreign currencies, depreciation or devaluation of which leads to a decrease in the value of the reserves held in them in terms of domestic currency, gold cannot be devalued, but its price fluctuates significantly. Although long-term price approach, especially in inflationary surroundings, may bring a smile on holder’s face.

---

Unlike foreign exchange reserves, gold resources are also not exposed to the effects of the monetary policy of central banks issuing reserve currencies. In addition, there is no possibility of unlimited increase in the amount of gold, while in the case of reserve currencies, central banks have right (and are not afraid to use it) for unlimited money creation. It is also important that gold reserves are not exposed to the risk of inflationary debt financing. In other words – more scarce equals more valuable. In addition, research indicates that large gold reserves positively affect the assessment of the country's credit risk, which is important for the cost of obtaining financing on international markets.

And hence, significant gold reserves being part of stable politics and responsible financial approach, increase trust in the central bank and the national currency. Positive impact of gold on the value of official reserve assets is particularly visible in periods of crisis, when its price increases as a result of investors' flight to safe haven assets. Results of surveys conducted by the World Gold Council show that the increase in gold prices during periods of crisis is currently the second most important reason for central banks to accumulate gold. Moreover, the value of gold has maintained a constant upward trend over many years – despite significant fluctuations in its price.

What is more, a special feature of gold is its effective protection against inflation (inflation hedge) in the long term. An increase in inflation or inflation expectations causes investors' demand for gold to grow, which also causes its price to rise. Gold is also an effective diversifier of central banks' reserve assets, primarily due to the low degree of correlation between the price of the metal and the prices of other assets and the negative correlation with the US dollar exchange rate. Gold is therefore a countercyclical component of the reserve portfolio. In this context, gold reserves provide special protection, as they allow for the diversification of political risk and constitute a strategic safeguard in the event of an armed conflict. For this reason, gold is referred to as an asset of last resort as well as to limiting the risk of a sudden outflow of capital.

In this way volumes of yellow metal support stability of the Polish currency. In addition, reserves can be used to support the stability of financial markets or the banking sector in the event of significant disruptions in their functioning. The floating exchange rate system means that the relation of the zloty to foreign currencies is fundamentally shaped by market forces, i.e. supply and demand for currency. Currency interventions are carried out by the NBP incidentally, and their purpose is not to achieve a specific level of the PLN exchange rate against foreign currencies, but only to counteract negative trends that could disrupt the efficient functioning of the currency and financial markets or negatively affect financial stability, or the effectiveness of the monetary policy implemented by the NBP.