The new governor of the Czech National Bank (CNB), Aleš Michl, has said that he plans to increase the institution’s gold holdings almost tenfold, from the current 11 tons to 100 tons. Michl also said he would ask the bank’s foreign reserve management team to invest in stocks.
Develop the CNB’s shareholding
The new Governor of the Czech National Bank (CNB), Aleš Michl, said that gold is good for diversification because “it has no correlation with equities”. Therefore, under his leadership, the CNB hopes to increase its holdings of the commodity from the current 11 tons to 100 tons or even more. However, this will be done gradually, the new governor said.
With this plan, which increases the bank’s gold holdings nearly tenfold, the new boss of the CNB, as one report noted, seems to be following in the footsteps of other European central banks which have repatriated or bought more tons of gold. For example, the Hungarian central bank revealed in 2018 that it had increased its gold holdings tenfold, while the Polish central bank reportedly did the same in 2019.
Meanwhile, in remarks during a wide-ranging interview with Czech publication Ekonom, Michl, a conservative economist, also said he would propose increasing CNB’s stake in the shares from the current 16% of reserves to 20% or more. He argued that central banks in Switzerland and Israel were already doing this, as were major state sovereign wealth funds.
A profitable CNB
Regarding the management of foreign exchange reserves, Michl, who is due to begin his six-year term as governor on July 1, said he will encourage the management team to invest the reserves in stocks. Asked about the risks of using reserves in this way, Michl replied:
Yes, the volatility of returns would then be higher, that’s the risk. But the expected return, in the long term, would also be higher. Together with our CNB colleagues Michal Škoda and Tomáš Adam, we are trying to calculate this risk as part of a research project. My vision is to have a profitable long-term CNB.
Michl added that his goal is to ensure that the expected returns on the CNB’s assets exceed the cost of the central bank’s liabilities. According to him, the CNB’s balance sheet and income statement may seem unimportant to others, but are important to him.
Once the CNB starts generating a positive return, the profits generated will be used to “replenish the reserve fund and other funds created from the profits”. Excess profits will be transferred to the state budget, Michl said.
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