Authored article by Governor for newspaper "Oslobođenje": The CBBH guarantees monetary stability

The CBBH guarantees monetary stability

Our convertible mark is stable and its coverage is based on our foreign exchange reserves, which currently amount to around KM 16.2 billion. Every year, and quarterly, we provide detailed information about everything related to foreign exchange reserves in our reports, which are public, and we are sorry that all of this is being ignored, consciously or unconsciously. It is an interesting fact that in no other country, from neighbouring countries to the world's leading central banks, is as much attention paid to the structure of central bank assets as is the case with us. In addition, I am not completely convinced that some, let's call them experts, fully understand monetary policy, especially our model, which is unique in the world, and all this in the context in which we are, in which we have just been and which is ahead of us. Let me remind you of one of the statements of Keynes, the most influential economist of the 20th century and according to many the creator of macroeconomics, when he said what an ideal economist should be, among other things, he said: "He must study the present in the light of the past for the needs of the future."

The one who claims that gold is the best option for investing foreign exchange reserves is clearly not an expert in the monetary field or his observation of the issue in narrow. As a rule, a simple solution, which is obvious only to a layman, regardless of the field in question, is wrong. The Central Bank of Bosnia and Herzegovina actively manages the portfolio of foreign exchange reserves in a legally established manner and in the best interest of BH. In any case, this includes possible sales and purchases of gold. Gold, in the last transaction, was exclusively sold in order to invest more wisely in something else. At the moment, that is what is much more favourable and promising for investment.

It is sufficient to clarify that gold is a non-interest-bearing asset unlike securities and/or deposits whose yields now range from 1 to 2.2%, depending on maturity. And the growth trends are obvious. On the other hand, gold has only a price, that is, a value by which it is recorded and book kept, and nothing else. That value, or price, is subject to significant fluctuations. Today, that price of gold is lower than the price at which we sold part of it. Many forget that until mid-August of this year, we had a negative interest rate on the international financial market for the last eight years, and therefore on our portfolio. In that period, we paid about KM 180 million of negative interest. For us, it is extremely important that we always had and still have a stable currency board, that is, a stable domestic currency. This is our contribution to monetary, macroeconomic and any other stability. The time of the Gold Standard is gone long time ago, and the latest research results on foreign exchange reserve management practices in the world's central banks show that only 20% of respondents believe that gold is a good hedge against inflation. Third, in a situation where yields on securities and deposits are rising, which is the case now, gold becomes less attractive for investment.

At the moment when the decision to sell gold was made, its price, historically speaking, was rarely higher. Perhaps this was the case in a very short period, in the middle of 2011 and at the beginning of this year after the outbreak of the war in Ukraine, if we are talking about the price in USD. However, as the CBBH expresses and values ​​gold in euros, due to its peg to euro, I must emphasize that the price of gold this year have had the record levels. We estimated that several factors contributed to the extraordinarily high price of gold: from the excessive difference in the policies of the American and European central banks, to the intensification of the war in Ukraine. For the sake of comparison, the current price per ounce of gold is about 40 euros lower than the price at which we sold part of our gold reserves at the end of September. In other words, if that amount of gold had been kept in the central bank's portfolio, it would have a significantly lower market value today. And more importantly, we did not sell the entire amount of gold in our portfolio, because that suited us from the aspect of managing market risks in our portfolio.

We have repeatedly emphasized that in the structure of foreign exchange reserves, gold accounts for 1 to 2%. Regardless of this, each part of the reserves is important and has a role to play. However, now we have the question on dealing with 1-2% of reserves, and not about the remaining 98% of foreign exchange reserves? Where was it invested? We record and book keep all reserves, as well as gold as value, not quantity. It is not clear to us how the question is raised about KM 10 (1%), if you have a total of 1,000 KM (100%).

We work according to clear principles and rules, and provide full coverage of the local currency. At the same time, we are unable to keep "unused" funds in assets. Much more economically developed countries can do that. The Law on the CBBH strictly obliges us to invest, first of all, in a safe way, and only then in a profitable way. According to the latest research from August this year, by BIS Basel, 1/3 of the central banks in the world have absolutely no gold in their portfolio. These are, for example, Canada, Norway, Croatia, Azerbaijan and others. While 2/3 of central banks have gold in their portfolio. The average share of gold in those countries is 8.4% in the structure of the portfolio of foreign exchange reserves. We work professionally and responsibly, in the interest of citizens and the economy of Bosnia and Herzegovina. The Central Bank of Bosnia and Herzegovina will continue to do its work in accordance with its mandate and legal powers, regardless of the pressures.