Everything you'd like to know about gold in Poland, but are afraid to ask p. 1

In our new series, we aim to focus on the subject of gold in Poland. We hope to cover all gold related aspects and try to answer important questions of who, where, when, why and how much. We aim to do that deeply, so our esteemed readers could use those analysis as a compendium of facts for years to come. In first part we’ll focus on gold reserves held by Poland’s central bank - National Bank of Poland – but with strong historical approach that seems to influence some decisions made today.

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Trends on vaults full of assets (under the mark of White Eagle)

W hy to start subject of gold in Poland from the middle? Why not focus on underground reserves and mining to preserve logical sequence? Reason is simple – National Bank of Poland (NBP) unexpectedly made purchase of additional 14,8 t. of yellow metal and then additional 20 t. These had been added to official reserve assets in April and May 2023, and has been officially confirmed in balances. Fact of making this purchase would definitely require coverage simply due to a fact that it is our central bank. But as we planned to release our series about gold in Poland anyway, there appeared to be risk of discussing same subject twice. So starting series with analysis of Poland’s official gold reserves would simply allow us to avoid duplication on the same subject. And so we have to start on past present and future of gold reserves in Poland.

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NBP holds as of end of May 2023 gold reserves of 263.5 t. in weight. That effectively gives us 11th place in Europe (including Russia and Turkey) in terms of gold reserves, and 23rd-24th place in the world, with approximately same holdings as Kingdom of Thailand. This result makes polish gold holdings nearly largest for the region of Central and East Europe. ‘Nearly’, as belonging to Germany, Russia and Turkey are much larger. In terms of geographical affiliation however, Turkey and Russia may not be considered as parts of Europe at all, and some consider Germany as west, so that leaves us with opportunities to have some regional borders being re-drawn, depending on point of view.

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Assuming that purchase has been actually made in April, that would give us narrow LBMA spot price with monthly candle opening at 1969 USD, closing at 1989 USD, with heights at 2048 USD and lows on 1949 USD – all figures rounded to closest full value. For May that would be 1991 and 1962 with volitality between 2018 and 1938 USD. Considering price action on gold for the last months, we could call above ‘a relatively calm’ peeriod.

Based on official reserve assets for April 2023, that means, gold equals 9.5% of all reserve assets in possession of NBP. There seem to be two approaches clearly visible in policies of central banks. One is to hold gold among reserves weighting in percentage terms between 0% and 10% of all reserve assets. Other approach is to keep between 60% and 80%. Of course individual policies – such as target duration and risk tolerance - are to be applied individually with regards to approach of each and any central bank. However above allocation approaches could be explained by two strong and long-term trends.

In case of largest threshold (60-80%), that usually is to be related with inheritance from the past times. This explains French and Portuguese gold holdings, as both used to rule vast colonial empires (with Paris still having heavy financial and corporate influences in West Africa). USA was beneficent of international capital transfers during both world wars, which by the end of 2WW made them hold 70% of all gold mined ever. Germany is always in fear of hyperinflation, having memories of how war could make currency worthless. During Cold War, western allies helped to rebuild county (1951-1968 is known as Germany’s economic miracle), making it European industrial and economic powerhouse. That allowed Germany to rebuild its gold reserves from zero in 1945 to 3,3k t. in 2023. Although, question about German gold reserves are being really free of “nazi history”, should be asked on this occasion. Another example is Italy, that served in the past as centre for European trade and as one of most important European economies.

One of the few notable exceptions is United Kingdom, which sold half of its gold reserves between 1999 and 2002. This was remembered as Brown's Bottom (after the Chancellor of the Exchequer at the time). Other would be Canada who in 2016 sold all its gold stating ‘it costs to hold gold, whereas holding U.S. or Chinese or Euro bonds yields you a return’.

Other approach (0-10% with possible extension above this threshold) is more applicable to a country who started from near zero gold holdings, rapidly developed and looked (or still looking) for diversification from dominant share of USD among its reserves. That was usually aligned with vast increase in size of foreign exchange reserves on emerging markets that followed global financial crisis of 2007-2008. Changes in gold holdings were accumulated gradually, following buy-and-hold strategy. At that time, central banks basically had less options to diversify its holdings, and gold seemed to be one of the few worldwide recognisable and liquid alternatives (we have explained that in more detailed manner in our ‘Gold in the BRICS Single Currency Concept p 1’ analysis). Among such gold holders are Kingdom of Thailand who made large purchases in 2010-2011 and 2021, India who added 200 t. in 2009 and continues purchases since 2017 or China and Russia, who follow policies to diversify from dollar towards different assets, but on totally different paces.

Poland, considered as developed economy, follows 2nd approach with its official gold reserves being currently at 9.5% of all. Reason for that lies not in aversion towards gold, but simply in historical aspects that shaped size of Poland’s national reserves and nearly zeroed them at a time.

Of Poland’s inter-war gold monetary policies

During First World War most countries abandoned gold standard to avoid having restrictions in monetary base extension, which could limit financing of war effort. At a time, it was considered as temporary change to the globally accepted monetary system. Pre-Great War Gold Standard effectively was based on 40% fractional reserve, with gold and gold backed treasury papers acting as collateral. It was accompanied regionally by Gold Exchange Standard, Latin Monetary Union and other similar systems allowing additionally usage of silver. However, system effectively supported gold above all, causing often political discontents if authorities tried to introduce bi-metalic standards – like in case of USA in early 20th century. Gold Standard effectively supported pound sterling as world reserve currency and pegged all the rest currencies to Imperial London’s finest in the form of stable fx rates. With the end of Great War (war, that supposedly was to end all wars), attempts to return to currencies backed up by gold in form of fractional reserve has been made. Conferences made in 1920 in Brussels and 1922 in Genoa, created more prestigious Gold Bullion Standard and designed for poorer economies Gold Exchange Standard. New monetary system linked currencies to gold, bearing promise of exchange on demand, but only in form of bars containing nearly 400 ounces. Effectively that ensured exchangeability to be nearly impossible for general population. Of course it is tempting to describe in details how this system worked with all its cons, pros and flaws, but as it is not subject of this analysis, we’ll leave it in here.

During First World War, since 1916, central powers eventually made immense progress on the eastern front, pushing armies of the Russian Empire far to east, effectively assuming control over all polish territories. In attempt to attract poles to ‘the cause’, central powers created fully dependent substitute for a Polish state and made promises regards to autonomy. That required however creating some formal structures. Hence, they established fully dependent on Berlin’s policies polish central bank (Polska Kasa Pożyczkowa). It kept printing polish ‘marks’ – fiduciary money, although bearing promise to be exchangeable to German mark it wasn’t directly non-exchangeable to gold. Large supply of monetary base around Europe upon that time was nothing unusual, as everyone eventually suspended coverage its currencies by gold and exchangeability in attempt to support unlimited war spending. It effectively created strong price inflation around a continent – including Poland - during war and for years to come.

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In 1918, Poland has been restored after over of century of being partitioned between its superpower neighbours. But in terms of ‘modernity’ at a time, it was considered as a new political entity, with its adversaries even calling it a ‘Treaty of Versailles made bastard’. Early years of independence brought war against soviet Russia and Silesian uprisings against Weimar Republic. That caused necessity to print money for war expenses so linkage of polish marks to gold was impossible to be introduced. However, polish mark officially still kept parity to German mark, each backed by 0.3584 g. of gold. Although this one was already at a time very hyperinflationary.

Shortly after Poland regained its independence, in January 1919, Head of State Józef Piłsudski issued a decree calling for the donation of silver and other valuables to the National Treasury. Numerous Collection Committees for the National Treasury were then formed. The public's generosity meant that by the time of the currency reform in 1924, 20 t. of gold and 120 t. of silver had been accumulated - together with bank reserves - as a "foundation of the Bank of Poland for the future zloty currency".

After 1921, Polish independence and most of the borders had been secured, however expansion of monetary base made since 1916 resulted in serious hyperinflation. It appeared, that at the same time, country required both international recognition for its trade and internal price stability. To meet these goals, in 1924 Poland made monetary reform which replaced its temporary currency ‘marks’ with polish zloty (złoty in polish means ‘golden’). Warsaw effectively had no choice but to fully accept Gold Bullion Standard as internationally recognisable monetary regime, with all its pros and cons, including limited exchangeability. That made newly created zloty internationally recognisable currency, as backed in gold initially in proportion of 0.2903 g. per one zloty (1 kg of gold = 3,444.44 zł) and since 1927 0.1687 g. per zloty (1 kg = 5,924.44 zł). It helped Warsaw to diversify its international trade. And there was a strong need for that, as Poland and Germany became quickly involved in a trade war for many years of inter-war period laying heavy burden on polish economy. After all, in 1924 Germany were responsible for 34.5% of polish imports and 43.2% of exports.

There is a good time for everything, and such was in case of Gold Bullion Standard that initially was supportive and stabilising. However deflationary tendencies in post war Europe and impact of Great Depression 1929-1933, made many countries to effectively abandon this system in attempt to devalue its currencies. Even Great Britain left Gold Bullion Standard on 1931 in need to de-value its pound sterling. Poland did not leave gold until April 1936, which effectively impacted its economy heavily with depression, deflation and at some point near complete collapse of industrial production due to currency being too strong. Reasons for that delay are to be seen in attempts to attract investments of French and other foreign capital and fears on return of inflation, which Poland struggled against during first half of 20’s. Also debasement of zloty would affect Warsaw’s abilities to modernise its army and purchase technologies. And that was considered as fundamental to preserve polish independence at a time, especially with hostile superpowers on the east and west. Discussions on leaving standard were of course being made, but slight economical improvements on late 1932 ceased discussion on changes. When USA suspended Gold Exchange Standard in 1933, many poles decided to exchange its dollar savings to polish zloty, which was perceived by Warsaw as a sign of strengthening zloty’s reputation. Hence, country continued its adherence to gold, which has been confirmed in 1933 by joining gold bloc formed by France, Italy, Belgium, Holland and Switzerland.

However just before that, Bank Polski SA (predecessor of National Bank of Poland) made some changes in policy, effectively reducing fractional reserve requirements from 40% to 30% (with remaining 70% being covered by silver and treasury bonds. This generally is being perceived as attempt to have engineered opportunity to expand its monetary base, but still within internationally recognisable structures of gold fix. Above was made as result of growing disillusion on France’s stance toward Warsaw as it appeared clear, that Paris is less interested in supporting Poland as ally and in supporting its stance on security of its western borders. Hence Poland opted for strategic reorientation, along with necessity to expand its own industrial armament sector. Death of authoritarian head of state - Marshall Pilsudski in 1935, and political comeback of Eugeniusz Kwiatkowski as treasury minister (considered as father to some of the greatest industrialisation programmes in Poland) enabled that, effectively ending era of stagnation and starting era of great investment plans into industrial sector. This direction has been confirmed as correct soon, as in 1936 France succumbed into internal politics and Germany’s (known then already as Deutsches Reich) made successful attempt to remilitarise Rheinland. At the same time, ongoing devaluation of pound sterling and American dollar – both unlinked to gold - effectively created capital flights from ‘gold bloc’ countries. In effect, Belgium and Luxembourg left it in 1935. Then Poland did so in April 1936. Bloc ceased to exist effectively in September same year, with France signing Tripartite Agreement with UK and USA.

Above stance finds confirmation in historical sources. As it was stated in 1936’s Bulletin of the state-owned Bank Gospodarstwa Krajowego:

“The Aggravation of the political situation in Europe and the threat of war had a negative impact on all countries and in first place on the members of gold bloc.”

Historical evolution of Poland’s gold reserves

With Poland being part of gold bloc and having fractional reserve requirements set on 30%, logical is, that country had to own gold. Expecting in 1939 war against German Reich, authorities decided not to evacuate gold from polish territory, as there were strong reasons to believe that upon slightest liquidity issues or even fall of Poland, gold could be forcefully ceased by Warsaw’s allies in attempt to settle its debts. History shows that it wasn’t ill-considered decision. Established in 1924 as a central bank of Poland Bank Polski SA, held in 1939 gold reserves of 79.5 t. worthy at a time 463.3 mln zł, which was equivalent of 87 mln USD. 193 mln zł in worth were located at a time in central vault in Warsaw, 170.4 mln zł in its branches across the country with remaining 100,2 mln zł abroad. And this is where long saga of polish gold during the war begins. On this occasion, there is a need to highlight sacrifice and professionalism of all involved bank employees, officials and military. Despite of world being war-torn, and despite of possible temptations not a single bar has been stolen or missed in action. However, it was nowhere near easy history, and volume fluctuated in time.

During the evacuation in 1939 to neighbouring Romania, four tonnes of gold had to be deducted from the whole. Three were placed as a deposit in the National Bank of Romania, while one was sold in attempt of acquiring funds needed to cover costs to be. On this occasion Bucharest declined diplomatic demands coming from Berlin to stop escape of polish gold. Evacuation was carried out via port of Constanca, via Istanbul to French Syria and Lebanon and from there to France. In the meantime, ship transporting reserves was close to being torpedoed by enemy submarine. Aftre reachin France, gold was stored in Banque de France vaults in Nevers. After the allied defeat in 1940, Polish gold (along with Belgian) has been evacuated to Casablanca, then to Dakar and then deposited in the fort on French Sahara until 1944. Vichy government refused to hand it over to the polish authorities, who attempted to seek help of British PM Winston Churchill and later even attempted to arrange military action to seize its gold reserves. Then, polish government on exile even attempted negotiations to put Bank of France's gold deposited in Canada at our disposal, however French gold was already seized by London who rejected polish claims. So, following Belgian example, polish authorities took Banque de France to court in USA requesting an 'arrest' on similar volume of French gold deposit held in New York. This ended up with success. Following allied successes in Africa, on beginnings of 1944, original polish gold has been eventually retrieved, divided into three parts and transported safely to New York, Ottawa and London.

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What has to be mention on this occasion is fact, that Germany, didn’t make formal decision to cease existence of Bank Polski SA on occupied territories. Although they had installed Bank Emisyjny that served as puppet central bank for General Governorate for the Occupied Polish Region. Reason for such lied in Berlin’s hopes to acquire polish gold in similar way, as it happened to Czechoslovakian in 1938. In this particular case, its directors were forced to authorise gold transfers from Czechoslovak accounts held in BIS and London, to BIS and London’s accounts of Reichsbank. From there, it was only a matter to arrange withdrawal.

Gold has been eventually used to finance war expenses of the Polish Army in the West and later to pay compensations for related expenses occurred by other allied governments. We could only speculate of how much ‘position of force’ has been applied by London, but eventually this has been settled by agreement signed in June 1946. Even now, many historians state that some volumes had been illegally seized by the British under the pretext of expenses incurred, and still undocumented until this day. Apart of war related expenses, gold had to be used to pay US, Canadian and French claims associated to compensation for the nationalisation declared in 1946 by new communist Polish government in Warsaw. After that, volume of 67.3 t. has been released by allies onto hands of Bank Polski SA.

However, existence of government in exile and new temporary government in Warsaw created state of political duality. Allies quickly recognised Warsaw based government, which has been further legitimised by rigged elections held in 1947. However, that caused questions with regards to ownership of Polish gold held by Bank Polski SA, Especially since Narodowy Bank Polski has been established as new central bank in 1945. This timing meant – by the way – that it was representatives of exiled Bank Polski SA, who signed in behalf of Poland, Bretton Woods accord in 1944. Eventually communist government issued treasury bills and forced Bank Polski SA to redeem them, hence new government took over pre-war deposits. With the official international recognition of Poland's new authorities, Bank Polski SA has been eventually abolished. Laws to gold been in hands of NBP, along with returned deposit left in Romania in 1939.

Physical volumes remained abroad in Canada, London and New York, where had been used as a collateral for international loans taken by Warsaw. As a result of 45 years of such policies, only 15 t. lived to see the fall of communism. Above included also payment of tranche required, for Poland to become member of International Monetary Fund, although Warsaw ceased its participation in 1950 (eventually restoring it in 1986). Unfortunately, it is nearly impossible to asses pace of diminishing polish gold reserves in between 1945-1989 as no information about gold and foreign exchange reserves were published until 1990. Some assessments have been made for 1970, so we know that state Reserve Foreign Exchange Fund was at a time at 1.7 bln zloty, with gold volume of 45.4 t. worthy at a time 51,1 mln USD. This would mean about 22 t. has been sold untill 1970 with further approx. 30 t. lost between 1970-1989. Post 1970 sales can be attributed to the effect of international loans Poland was taking in first half of 70’s in attempt to restructure and improve its industry. However failure to do so (partially to be attributed to strategic planning errors and partially to change of macro-economic conditions) affected Warsaw’s ability to pay its debts. With further worsening of internal situation, mass strike actions and later introduction of martial law in 1981, heavily indebted country eventually was unable to fulfil its financial commitments and announced technical default in 1981.

It is therefore possible, that some of polish gold has been seized by its lenders in attempt to secure payment of financial obligations.