Rumblings In the Global Gold Market

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The Hard Assets Alliance Blog

Rumblings In the Global Gold Market

It wasn’t long ago that the West dominated the global gold market. Today, power—at least in the physical market—is firmly concentrated in the Eastern Hemisphere. The world’s largest gold consumers—China and India—rightfully garner most of the attention, but they aren’t the only ones stirring things up. Russia is quickly becoming a country to watch, albeit for reasons much different than its Eastern counterparts.

Central Bank Purchases Fuel Russian Gold Demand

In India, gold is an obsession. Not even hefty premiums and import duties can get between Indians and their gold. In fact, the World Gold Council estimates that as much as 250 tonnes of gold have been smuggled into India since import controls went into effect last year. China’s appetite for the yellow metal is just as insatiable. Recently circulated photographs of Chinese housewives waiting in line for hours to get their hands on discounted gold are testament to the nation’s love affair with gold.

Consumer demand in Russia doesn’t come close to India or China. Instead, it’s steady purchases by the Russian Central Bank that has captured people’s attention. Since 2006, the Russian Central Bank (CBR) has bought 500,000 ounces of gold each month on average. In April, the central bank made its largest purchase since 2010 when it added 900,000 ounces, or about $1.7 billion worth of gold, to its reserves. Russia’s official gold reserves have more than doubled since the 2008 economic crisis began, though bear in mind that Russia, like China, is suspected of underreporting its gold reserves for strategic reasons.

Local production supplies most of this gold, so there’s something to be said when Russia’s total output increased 12.6% last year to an all-time high of 254 metric tonnes, which was enough to make Russia the world’s third-largest producer behind China and Australia. Last year was also the first time in 25 years that Russia produced more gold than the United States.

Record consumption and output are elevating Russia’s place in the global gold market. Just don’t think that the CBR is accumulating all this gold as part of some sound-money policy agenda. This is all about politics, and once again Putin is pulling the strings.

The Impact of “Putinization” on Gold

Vladimir Putin is notorious for his aggressive approach to geopolitics. Although overshadowed by his resource nationalization efforts, Putin has taken major steps to insulate Russia from US monetary policy due to what he perceives as an abuse of the dollar monopoly.

Over the past year, the CBR has sold nearly one-third of its US Treasury holdings, including a $26 billion liquidation in March. This massive sale, which represented 20% of the bank’s holdings at the time, was widely regarded as retaliation for Western sanctions for Russia’s involvement in Ukraine.

The Ukraine crisis aggravated already strained relations between the former Cold War foes. And with the conflict far from resolved, Washington is expected to lob additional economic sanctions at Russia—an action that would only reinforce Russia’s efforts to decouple from the USD.

Additional sanctions notwithstanding, tensions between the US and Russia aren’t about to fade away, which gives the CBR even more reason to trim its position in US Treasuries. The central bank will need to replace these assets with risk-free equivalents, and numerous indicators point to gold—the only currency that isn’t somebody else’s liability.

Gold’s strategic importance in Russia has grown dramatically since Putin set a foreign-reserve goal target of 10% in his first mandate. After more than a decade of steady buying, the CBR is closing in on this target, though additional purchases cannot be ruled out. The CBR’s gold reserves are still far below the Federal Reserve’s and European Central Bank’s, where gold makes up 70% and 56% respectively of total foreign exchanges. Numerous high-ranking Russian officials have also recently stressed gold’s role as a strategically important monetary asset, and then there are the widely circulated photographs of Putin gleefully holding gold bars.

Although still a marginal player in the global gold market, Russia isn’t a country investors can afford to sleep on. Even if the Russian Central Bank’s appetite for gold wanes, Putin’s hardline approach to politics is a recipe for uncertainty, and we all know how gold fares amid times of uncertainty.

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