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Why Serbia’s President Just Demanded a 9-Ton Gold Buy

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Why Serbia’s President Just Demanded a 9-Ton Gold Buy

By John McDonald

When the Serbian central bank received directions from the country’s president to make a big gold buy last week, the institution responded quickly. By mid-November, the country had increased its gold reserves by 9 tons. 

“Serbia is safer today with 30.4 tons of gold worth around $1.4 billion,” Central Bank governor Jorgovanka Tabakovic told reporters in Belgrade in the wake of the purchase. She added, “For now, we have no plans to buy more.”

The purchase is part of a long-term strategy in Serbia to stabilize its financial situation in the global economy by adjusting the structure of its foreign debt. The country paid more than $434 million for the gold at a rate of $1,503 per ounce. 

After the purchase, the central bank upgraded the 2019 economic growth forecast by 0.1 percentage points to 3.6 percent. The bank’s economists cited “higher domestic demand” and explained that demand was “counterbalancing a slowdown in most of the European Union.” In early November, the International Monetary Fund predicted the Serbian economy would grow by 4 percent in 2020.

Serbia is likely using the large gold buy to help bring national inflation back under control in the coming year and to keep the exchange rate of the dinar to the euro in check. The country’s central bank purchases different currencies and gold in order to influence the exchange rate. 

In addition to the gold purchase, the bank had bought more than 2.6 billion euros by the beginning of November. The bank has also cut interest rates three times in 2019, which affects the exchange rate of the dinar against the euro.

Tabakovic conceded that although the central bank might alter how it charts and controls the money supply after this purchase, the national inflation target would not change in the coming months. That target, which is between 3 percent +/- 1.5 percentage points, is set to hold through December 2021. 

She added that the central bank will not choose “between inflation falling within target and exchange rate stability” because “the stability of investments and the predictability of business environment” is paramount. Essentially, Serbia’s central bank is using gold much as many individual investors do: as a safe-haven asset to hedge against future economic turmoil. 

Given that the consumer price index in Serbia has fallen below the tolerance band for inflation five times in the last three years, that stability is imperative both for logistical purposes and to help improve consumer confidence. Interestingly, the most recent plunge below the band resulted from the availability of cheaper fresh vegetables, said the central bank’s head of economic research. 

Sources: Bloomberg, Reuters

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