The Hungarian National Bank has recently announced whopping tenfold increase in its gold reserves. The announcement was made in Hungary's capital Budapest to increase the country's gold holdings from 3.10 tonnes to 31.50 tons by purchasing and repatriating 28.4 tonnes of gold.
The gold reserves of the national bank of Hungary were unaltered since 1986 (32 years to be exact). Before that period, reserves were rapidly being declined purposefully because of country's lack of interest in gold investments. Now because of rapidly changing financial trends and the present significance of gold reserves for a country's financial stability, Hungary has currently planned to buy gold as a long-term investment rather than buying it for a short term.
According to a press release by the National Bank of Hungary, the sole purpose of this gold purchase and repatriation is to strengthen the economy by boosting the market confidence and financial stability.
The financial importance of gold:
It is true that a country's gold reserve is an important instrument that can be used to build trust amongst businessmen and investors by stabilizing the economy. This trend is becoming increasingly popular in both the developing as well as the developed world. Not only does it helps to increase and stabilize the currency value, but it also allows the nation to print more currency notes.
Hungary's history with gold:
With its gold reserves now sitting on 31.50 tonnes, Hungary has reached the same level as it was 32 years ago in (1986). The Hungarian National Bank was formed in 1924. Since then its gold reserves have fluctuated due to a number of strategic and financial causes. Hungary received 30 tonnes of gold after World War 2 to help it stabilize and consolidate its economy and to enable it to introduce a new currency.
In the mid-eighties, Hungary fluctuated its gold reserves due to its short-term gold investment strategy. The reserves were hence reduced to 3.10 tonnes. This quantity was maintained for 32 long years (since 1986).
Gold as an investment:
In addition to its stabilizing role in the economy, gold is also frequently used by countries for investment purposes. There are two categories of gold investment.
Short-term gold investment means that a country buys gold at a lower price, stocks it and then sells it at a higher price to earn some money. This process is repeated to try and earn a profit or a return on investment.
Long-term investment is a different thing. In this type of investment, gold is bought and stocked for a longer period of time. This not only allows the country to print more currency, but the gold can later be sold for a higher price just like short-term investments.
The National Bank made it clear this time that they are interested in long-term investment of these gold reserves to support the economy of Hungary.
Precious Metals are a useful tool to defend the country against a geopolitical crisis. Being a member of the European Union, Hungary is a member of ESCB (European System of Central Banks). But it is not a member of the Eurozone and has its own currency instead of the Euro. Therefore, it is an interesting long term strategy that the country has introduced to strengthen its domestic currency.
The gold trend:
Due to constantly changing economic trends, Hungary is not the only country to buy gold recently. According to an update by IMF International Monetary Fund) Poland has also announced an increase in its gold reserves to 117 tonnes. However, almost all of Poland's gold is currently stored in the Bank of England.
Austria, Hungary's close neighbor, has recently repatriated 140 tonnes of gold from the Bank of England. Germany and Netherlands are also in the process of repatriating their gold.
The question arises, “why do so many countries store gold?” The answer to that question is very simple: Gold is present in a limited quantity hence the title “precious metal.” That is why it is considered one of the safest assets to invest in. According to international rules, the amount of currency a country can print depends on its gold reserves. With this in mind, Hungary's intentions regarding the country's recent gold purchasing plans become quite clear.