Net Equity Effects from the Revaluation of Monetary Gold in the Eurosystem
Many central banks have turned to gold purchases during recent years, partly as a substitute for USD-denominated assets in their balance sheets (OMFIF 2024). However, the percentage share of monetary gold in total FX reserves is in general in single digit numbers for those countries which have accumulated large stocks of foreign reserves.1 In some European countries (e.g. Czechia, Hungary, Poland) central banks increased also their holdings of monetary gold in physical terms while for the case of the ECB and most of the NCBs of the Eurosystem holdings stagnated after the decrease in the early 2000s. By contrast, the value of monetary gold in EUR-terms has shown a strong increase in the Euro area in recent years, particularly in 2024. As a result, revaluation accounts more or less went in line with gold price changes and the revaluation of monetary gold holdings.
These large revaluations have had an opposite effect to central bank losses which have been recorded since the turn in monetary policy in the second half of 2022. Data for Internal Liquidity Management (ILM) of the Eurosystem (provided by the ECB) does not allow for a clear picture concerning those losses. The evolution of the item ‘Capital and Reserves’ mirrors the high losses recorded in the year 2023 only for some countries (e.g. Austria, France). In these cases the deduction of losses from capital and reserves is only shown in the following year, which further distorts the picture. For 2024, losses are in a similar range like in 2023, as was presented for instance by the ECB, the German Bundesbank or the Oesterreichische Nationalbank.
Cumulative losses of 2023 and 2024 are in many cases lower than the revaluation of monetary gold in 2024, resulting in a positive effect on net equity. However, as long as monetary gold is not sold by central banks, this counteracting effect cannot be realized. Since central banks hold a high fraction of globally mined gold as reserves, a coordination mechanism would also be necessary to prevent negative price effects that would result from uncoordinated gold sales. Central Bank Gold Agreements (CBGA) were signed several times in the past in order to coordinate activities on the gold market. On the other hand, it is not really problematic for a central bank if its equity slips into the red as a result of losses. Recapitalization by the national governments, which is also being brought into play, would therefore not be a necessary step. In this respect, the movements shown in the balance sheets remain purely accounting mechanisms.
References
OMFIF. 2024. “Gold and the New World Disorder. Consequences of Central Banking Shifts.” Official Monetary; Financial Institutions Forum.