Gold in Focus of Central Banks, but Not HNB

Global demand for gold, driven by increased investment and the search for a safe haven for capital, is strengthening again. According to the World Gold Council, demand rose by three percent year-on-year in the last quarter, while spot gold prices surged by as much as 50 percent this year. A record was set on October 20, when an ounce of gold reached 4,381 US dollars, fueled by a combination of geopolitical tensions, uncertainty around US tariffs, and a new wave of investor fear of missing out on the trend, or the popular FOMO effect.

– The outlook for gold remains optimistic as the continued weakness of the US dollar, expectations of lower interest rates, and the threat of stagflation could further boost demand for investments – stated Louise Street, senior analyst at the World Gold Council, adding that research shows the market is not yet saturated.

In the third quarter, demand for gold bars and coins increased by 17 percent, led by India and China, while inflows into physically-backed gold ETFs surged by 134 percent. The largest physical category of demand, jewelry manufacturing, recorded a decline of 23 percent to 419.2 tons, attributed to high prices deterring consumers. However, this decline was almost entirely offset by increased purchases by central banks, which increased their gold reserves by ten percent from January to September this year, to as much as 634 tons.

The rise in gold reserves worldwide has reopened the question of reserve policy in Croatia as well. Strictly speaking, Croatia does not have gold; rather, at the end of 2022, it acquired the minimum gold reserves necessary to join the Eurozone. As announced at the time, Croatia purchased gold worth 96 million euros, which, at the current gold price, amounts to about 820 kilograms of gold. The ‘Croatian’ gold, along with part of the foreign exchange reserves, was thus transferred to the European Central Bank (ECB).

– When entering the euro area, HNB was obliged to transfer part of its international reserves to the ECB, both in US dollars and in gold. The transferred gold is managed by the ECB, but this does not mean that Croatia loses ownership of it. HNB has retained an equivalent amount of receivables from the ECB in its balance sheet, so its assets have not decreased – HNB explains.

HNB: Buying Gold is Not an Economically Rational Move

In other words, although physical gold is no longer under the direct management of HNB, it remains part of the central bank’s financial assets. So, we have it, but it is not with us. When asked whether HNB is considering increasing the share of gold in its reserves, the central bank responds that this is not currently planned.

– The largest part of HNB’s financial assets consists of what represented the international reserves of the Republic of Croatia before entering the euro area. Today, they are mostly in euros, while a smaller part, denominated in other currencies, still has the character of international reserves. Along with the usual instruments such as cash, foreign currency deposits, and bonds, international reserves can include gold, but HNB is currently not considering increasing reserves in the form of gold – HNB states.

Until it was required to buy gold due to its entry into the eurozone, Croatia had not held gold for 21 years, and the last gold it had, 13.127 tons acquired from the inheritance of the former National Bank of Yugoslavia, was sold in 2001 for about 115 million dollars.

– The gold was sold at a time when other classes of safer financial assets offered more stable and solid returns. Also, at that time, in the early 2000s, there were no geopolitical tensions or global crises as we have seen in recent years, which are the main drivers of rising gold prices. It should be added that in that completely different environment, many other central banks also decided to sell gold. Additionally, it is important to emphasize that when gold was sold, HNB’s portfolio was not protected in case of a price drop – they told Lider from HNB.

HNB also noted that purchasing gold from other countries does not necessarily have to be an economically rational move.

– Regarding the motivation and demand for gold from central banks, it can be said that the reasons for holding gold are very complex, partly due to historical legacies and many non-economic factors. It is also not common practice for central banks to buy gold and then sell it when the price rises for financial gain. In recent times, sudden changes in gold prices and their significant increase have been influenced, among other things, by unexpected geopolitical events (wars and related sanctions), and to a lesser extent, economic movements. Therefore, the decision to purchase gold by certain central banks has often been politically motivated rather than driven by the investment policies that central banks adhere to in managing international reserves – HNB officials stated.

HNB Cannot Afford Losses

In other words, although central banks from various parts of the world, including the EU, are intensively accumulating gold reserves, often as part of a broader shift away from the dollar and the US financial system, HNB currently remains conservative in its approach. We asked Professor Marijana Ivanov from the Faculty of Economics in Zagreb why this is the case.

– As far as I know, one of HNB’s arguments has been that they must manage the portfolio based on liquidity and security principles, and gold can be quite illiquid at times. This is clearly not the case now. In recent history, HNB has emphasized that gold does not yield returns, meaning it does not generate any stable income, but only capital gains or losses. This makes sense because HNB must generate income from its portfolio and total assets, such as interest, which then finances the interest it pays to banks on overnight excess reserves, as well as all other numerous expenses for its operational activities. Furthermore, I assume that in the case of unrealized capital losses due to a drop in the market value of gold, this would then be recorded against capital, and HNB cannot afford capital losses or a situation where the state needs to recapitalize it – Ivanov briefly explained to us.

In any case, gold in HNB, apart from that which is recorded in the balance sheet as receivables from the European Central Bank, will not be present in the upcoming period according to the current stance of that institution, thus leaving us as the only EU member state without it in its reserves.