Russia is on a gold buying spree – should we be worried?

Vladimir Putin holding a gold bar © Getty images
Russia has acquired a sudden taste for gold

Yesterday, a fund manager friend sent me a chart containing a conundrum. It has two lines. One shows the gold price over the last two years, and the other the CRB metals index. The CRB is down by 30%. The gold price has fallen by a third of that. He asked me why I thought that was. The answer might be partly the same as it usually is when gold moves separately to other metals, I thought. It has safe-haven characteristics, and so when markets are volatile, investors (such as those on the MoneyWeek staff!) buy.

Look more closely, said my friend. It isn’t private or institutional investors buying. It is Russia. Russia’s total reserves in US dollars have fallen recently (as you’d expect given the oil price collapse), but its holdings of gold are up by 30% since 2014. Russia now holds as many ounces of gold as the gold exchange-traded funds (ETFs) do. In June alone, it added 800,000 ounces – the equivalent of some 12% of global annual gold mine production according to seekingalpha.com. That’s a lot of gold – and a buying speed that looks ambitious given the implosion in the oil price.

So, two questions for readers. First, what happens to the gold price in the short term if Russia stops buying? That’s a rhetorical one. But second – and to this I don’t really know the answer – why is Russia dumping its other reserves for gold?

A quick answer might be that it felt it had to sell Treasuries in the face of Western sanctions last year – as South Africa did in the face of anti-apartheid sanctions. But that’s not enough of an answer – Russia bought gold in huge volumes before the threat of sanctions and has kept buying even as that threat has retreated.

Another answer is that it is attempting to support the local mining industry by keeping demand up (producers aren’t allowed to export directly – they have to sell to the banks, who can then sell on to foreign buyers and the central bank).

Or maybe it is just that, like most other central banks, whatever it might or might not say in public, Russia remains convinced that gold is the best form of money there is, and the one on which some future system will be based. Note that far from wanting to wind purchases down, the Russian central bank has said that it intends to increase its reserves to $500bn worth – that’s double what it holds at the moment.

Finally (and I hope this isn’t much of a part of the answer), maybe Russia is thinking of doing something that will bring the threat of sanctions back. Either way, it is something to watch.

  • david craig

    I note with interest that Bill Bonner’s MoneyWeek tells us “Don’t expect to see $100 oil again soon – here’s why” while Bill Bonner’s The Oxford Club warns us “Brace yourself for $100 crude”. Ooopps!

  • Box of Frogs

    Or maybe it is just that in ruble terms their gold investment more than holds its value and has been traditionally a one way bet…. take a look at :

    http://www.goldpriceoz.com/gold-price-russia/

  • Box of Frogs

    A more interesting question i would be interested in hearing the answer to is :

    Why does the SNB and Rijks bank not use their QE programs to just buy foreign held physical gold and repatriate same to Switzerland/Sweden respectively ? That way they can ensure a devaluation in their currencies relative to the EU/US/UK/JApanese tail chasing QE programs. Surely that is a cleaner more direct method of achieving their goal without encouraging government profligacy.

    Unless the central banks just cancel those treasuries they have bought, i fear the program is ultimately going to be deflationary, since governments will still have to maintain, and repay those bonds on maturity. (which means they will need to raise taxes – reducing disposable income further) All they are achieving is providing short term liquidity at a cost of mispricing treasuries and the misallocation of resources. Liquidity in my opinion is not the issue.

    • Ellen

      One part of the answer to your question is that the price of gold would then rise. We need to get past the idea that we live in a free market economy – central banks and the IMF are essentially ‘Price Fixing’ each asset class and the use of paper assets, or derivatives, accommodate this. Central banks, since 2008, have been attempting to transfer wealth from people to the banks by forcing people to take out more debt in order to survive and speculate with their savings in equities and property. To do this, cash and gold must both be unattractive. With cash, QE and ZIRP, reduces its value beside other asset classes. Unfortunately QE benefitted very few people and wages didn’t rise alongside the mammoth expansion of money supply – the ‘trickle up’ theory. As there is a more finite supply of gold, QE for gold is where the price is manipulated downwards in the derivatives market – this is what GATA have been accusing central banks, via COMEX of doing for year, a view I concur with. It is estimated there are 100 troy oz of paper claims on every troy oz on physical gold out there – QE on steroids.

      In the end we need a currency where people can trade goods and services and make enough from doing this to survive. We have moved a long way from this as a direct result of the collusion of our elected representatives, the government, and a maverick banking system that has become a cancer to our societies. If people are not allowed to survive using the accepted currency, they will find other ways to trade – and indeed we already have a few examples of a return to barter which are easily found online.

      Without going into the historical importance of the role gold has played over the centuries in allocating value on the goods and services people provide, suffice to say, at the very least it provides a reference point, a set of limitations to anchor spending to. It is clear we cannot just carry on printing money until those who attend Davos enslave the rest of us – or, at least I hope not. Our currencies are leading us down this path so, I would say, they are already not fit for purpose. Fiat currency needs to be replaced. The IMF, the World Bank and central banks and governments throughout the world know this and gold must have a role to play in the next chapter.

      • Phil G

        Helen, I agree with everything you have written. I believe that the gold and silver price is artificially being suppressed on the paper COMEX. Silver is flying out of the US Mints doors almost as faster as they produce them. when the financial system was on its knees in 2008. The US Mint may have sold over 44,000,000 silver eagles so far in 2015. What would the masses think if this was splashed in the tabloids, yet nothing seems to be mentioned in the papers – only certain bankers talking the price of gold is going down to $1000.

        The value of the currencies is being destroyed by money creation in the form of debt. This is why prices for various things, antics, paintings, high value cars, and housing I believe are increasing in price and continue to march upwards. Debt creates ever more money which as more money is created it devalues money and forces prices to ever increasing highs (inflation). The financial system is a big Ponzi scheme, which when anchored by the gold standard, kept money creation and therefore the destruction of the value of money to a minimum, including prices. Just like a pyramid scheme, the scheme only works if there is new money coming in at the bottom – in this scheme the masses. Trouble is the masses for various reasons including paying back debt don’t have the money to fill the pockets at the top – which creates deflation – lots of goods, but not enough people to buy them.

        Bankers do not like the gold standard and nor did politicians as the gold standard restricts money creation (every $ created is to be backed by gold). America got the world currency on the basis that their currency was backed by gold and the premise that the US $ was as good as gold. Considering that most gold by then had been paid to America during the war or transferred by some countries to America to hold their gold, I guess that made sense. That changed when Nixon removed the US $ from gold backing as they tried to suppress the price of gold and realised that their gold was flying out of the door due to redemptions. Nixon broke the link and gold floated in the open market. We are now living with the consequences of allowing the banks, whether World, IMF or other banks who now control money and are the only winners of the Ponzi scheme we are now living with today. Gold going up to $1990 showed the masses what was happening with the value of money in the shape of the $. It was swiftly suppressed and continues to be suppressed by a fractional gold system of paper and derivatives, which on occasions and in certain places may be up to 90 paper claims to every 1 oz of gold available.

        The IMF and World Bank I believe know what is going on and help to deceive the masses. As I read once – don’t go by what bankers say, watch what they actually do. At present it seems many central banks are buying ever more gold – even though the prices seems to get hammered on a regular basis and the likes of Goldman Sachs talking down the price of gold, just before the prices gets hammered again. JP Morgan may have up to 55 million ounces of silver in their vaults, up from 5 million 3 years ago. What do the banks actions seem to indicate, compared to what they are saying to the masses and the world in general….?

        • 4caster

          I agree in general, but most money is created by the retail banks, not the central banks. They lend depositors’ money out. It is soon returned as new deposits, against which the bank can lend more money to borrowers, and so on. The process is called fractional reserve banking, and it existed long before the gold standard was killed. Bank deposits and banknotes were not all backed by gold.

  • merrynsw

    From the FT yesterday on Russia’s movements: “The US is debating whether to position more ships and naval assets in Europe as Russian warships and submarines operate at levels not seen in two decades, according to the new head of the US Navy”

  • merrynsw

    @disqus_i1puZAQrzU:disqus Different analysts.. different views!

  • 4caster

    If the Russian Central Bank is buying large amounts of gold. some people must be selling similar quantities. Otherwise the price would keep rising.

    • Sinbad2

      No, the US has been manipulating the price of gold by selling gold futures at a loss. There are now 293 paper ounces of gold for every physical ounce of gold at the US gold exchange(COMEX).
      The US has been doing this for some time. It is actually very difficult to buy real gold at the official price.

      • 4caster

        Hi Sinbad,
        I know the Federal Reserve has been suspected of manipulating the gold price downwards for many years; GATA has strong evidence of this. I did not know that 293 ounces of paper gold exists for every physical ounce on COMEX. But I also know demand for physical gold exceeds supply, hence the premium of a few percent on Krugerrands and sovereigns. Is that premium also reflected in selling prices, for example through Baird or Chard or an ETF that matches its liabilities with physical gold? I don’t think so.

        • Sinbad2

          I don’t know, here in Oz lots of people buy gold, but I would only buy from the Perth mint, they pay about $100 less than they sell it for, which is pretty close to the published price of gold.
          The thing with the US manipulating the price down is countries that are cashed up, are swapping their US dollars for gold.
          I would not be at all surprised if the US Government was also buying gold, because they would know that the US dollar is doomed in the longer term.

          • 4caster

            Yes, in 2003 I bought gold at the Perth Mint, also 2,645 ounces of silver, and made considerable profit. I sold in tranches between 2007 and 2010, and would have made a lot more if I had kept the holdings a bit longer. They charged a premium on the bullion price when I bought, which I assumed to be their cut. But when I sold the first batch I was pleasantly surprised that they paid a premium out as well.

  • Trade Yodha

    Today what we are experiencing is a symptom of excessive quantitative easing and value of currencies going down all over the world. I do not think with current monetary system, it is possible to contain situation. It is going to get worse and worse. Ultimately the only way forward is end of FIAT currencies and have Gold/Silver backed currencies which will have real value. Governments will not be able to just print as much paper currencies as they can and each currency bill have some real value. This will also show the real debt on governments rather debt being just a number which just keeps on increasing and going through debt ceilings. Russia, India and China and stocking up gold excessively for only one reason. The reason is that they ultimately know that FIAT currencies will die and gold backed currencies will have to take over to get us out of this mess. China is working very hard to get RMB (Chinese Yuan) accepted as Reserved Currency. All they need to do is get their currency in important places and get it international purchasing power and then back it up with real gold to give it the best value in whole world killing Dollar and Pound.

    -TradeYodha
    TradeYodha.com