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LAWRIE WILLIAMS: Polish Central Bank to up gold purchases, but what about Russia?

According to the World Gold Council (WGC) the volume of central bank gold purchases dipped sharply in 2020 with China saying it had dropped out of its gold buying programme in late 2019, and the Russian central bank officially ceasing gold purchases in April 2020.  These had been the two largest reported central bank gold purchasers in previous years and this led to 2020 officially recorded central bank gold purchases falling to fractionally short of 273 tonnes – a drop of over 395 tonnes from the 2019 level.  Whether one can trust the Chinese data is uncertain given that country’s past track record in denying gold purchases, but then coming up with admitting large gold accumulations after a few years of such denials, saying the accumulated gold was held in separate accounts which did not need to be repor ted to the IMF.

One country which has announced that it proposes to up its gold reserves over the next few years is Poland.  The country has been expanding its gold reserves over in recent years and they now stand at 229 tonnes, but pro-gold central bank Governor, Adam Glapinski, has reportedly stated in a magazine article that “Over the course of a few years we want to buy at least another 100 tonnes of gold and keep it in Poland as well.”  This would be an indicator of the country’s financial strength.  The increase in Polish gold reserves in the past few years has been a policy decision by Glapinski, which he hopes to carry through to the future if he continues in his position.

In its Gold Demand Trends report on the 2020 year, the WGC notes that Turkey was once again the largest annual gold buyer last year, adding 134.5 tonnes to its official gold reserves.  This brought its total gold reserves to 547 tonnes (42% of total reserves). India, a regular purchaser since early 2018, added 38 tonnes of gold to its reserves during the year, within the 30-40 tonne range it has established over the last three years. And despite its buying being limited to Q1, Russia remained the third largest buyer in 2020, growing gold reserves by 27.4 tonnes.  The UAE 23.9 tonnes, Qatar 14.5 tonnes, and Cambodia 5 tonnes also made relatively sizeable additions to their gold reserves the WGC reports.

Turkey’s gold intake contribution was actually probably far higher with other reports suggesting it actually imported over 500 tonnes of gold last year – the balance presumably disappearing into the country’s commercial banking sector.  Despite being the largest buyer on an annual basis, Turkey’s central bank was also the largest seller of gold in H2 among the world’s central banks; its gold reserves declined in the half year by a net 36.3 tonnes after two chunky sales in September and November. These were its largest monthly sales since it resumed regular buying in May 2017.   

But, the WGC notes, the sales did not signify a strategic shift in policy, rather they were reflective of local gold market dynamics.  Higher levels of local gold bar and coin demand in the second half of the year led to increased trading between domestic commercial banks and the central bank, causing this reduction in reserves.  This mechanism is part of a range of gold policy tools with which the country’s central bank manages its gold market.

The WGC went on to comment on the coronavirus pandemic’s impact on global central bank buying and selling last year, adding that Covid-19 was also a driver for some central bank sales.  These were primarily concentrated among a small number of central banks that buy gold from domestic production, such as Mongolia 12.5 tonnes and Uzbekistan 11.8 tonnes. Gold’s performance during the year boosted reserve portfolios, providing central banks with additional firepower when it was needed.

The WGC further noted that some banks saw this as an opportune time to obtain liquidity to support their struggling economies. These intermittent sales have resulted in a more complex picture of central bank demand at the end of 2020, having created a small interruption in the pattern of consistent buying since 2010.

We have ourselves speculated that the Russian central bank might return to purchasing more gold, although so far it has not given any indication that it plans to do so.  Our view has been that is because the cessation of gold buying – which mostly came from purchasing product from the country’s own mines - was halted to persuade Russian gold miners to sell their production on international markets.  This policy arose, at least in part, because the country’s principal export earner had been the oil and gas sector and the sharp fall in the oil price last year had led to a significant shortfall in export earnings, which adversely affected the country’s balance of payments position.  Gold exports would thus replace oil exports as the major earner and redress the current account position. 

This year the oil price has improved by around 50% so the country may now consider itself in a position to resume gold purchases given the sharp improvement in its current account position because of the big pick-up in oil and gas revenues.  Despite U.S.-promoted economic sanctions, Russia is technically in a far superior economic position to the U.S., having not run up the kind of enormous external debt the U.S. has.  Russia currently runs a substantial balance of payments surplus, as compared with U.S.’s big deficit and its external debt position is at a fraction of that of the U.S.

Even so, the WGC says that it expects to see continued net buying from central banks in 2021, with purchases expected to remain at a moderate pace although below the record levels seen in some previous years.  That opinion is put forward without any suggestion of the resumption of Russia resuming its gold purchasing programme which would enhance the position should it do so.  The possibility of capital inflows into emerging markets, resulting in higher reserves, and the continued ultra-low interest rate environment, may thus lead to central banks adding gold for diversification purposes.

Chris Watling of Longview Economics, writing in the UK’s Financial Times, reckons the global economy is ripe for a great reset – an opinion expressed by other economists too, although what this could, or should, incorporate generates somewhat differing opinions.  There is suggestion that any new reserve currency which eventuates if, or when, any global reset  may occur would include gold in its make-up.  Thus it makes sense that those countries which feel they should be heavily involved in what may develop, including Russia and China in particular, could be considering building their gold reserve positions accordingly.   

There has always been considerable doubt about the true volume of China’s gold reserves with many feeling they could be several times the official figure of 1,948.3 tonnes putting it in sixth place globally as far as reported figures to the IMF are concerned.  More credence is given to Russia’s reported total of 2,295.4 tonnes in 5th place, but both these are hugely behind the U.S.’s sometimes disputed level of 8,133.5 tonnes – and also behind those of Germany, Italy and France too, so there is reasoning behind the further building of gold reserves to enhance the Russian and Chinese positions.  We shall see what develops, but there is indeed logic behind countries continuing to add to their gold reserves up until any global financial reset may take place.

19 Mar 2021 | Categories: Gold, Russia

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