LAWRIE WILLIAMS: Russia accelerates gold purchases
The Russian central bank has announced yet another increase in its gold reserves in September – this time it has added a massive 1.2 million troy ounces (37.3 tonnes) to the gold in its forex holdings. This brings the overall total to 65.5 million ounces (2,037.3 tonnes) and means it has added just short of 200 tonnes of gold to its reserves in the first 9 months of the current year which represents an increased acceleration in its reserve increases over the prior few years. While it remains in fifth place among nationally reported holders of gold to the IMF (we think China in sixth place on its official reporting may actually hold more) it is ever moving closer to the big European holders – Italy and France – in the global gold reserve table which respectively report holdings of 2,451.8 tonnes and 2,436 tonnes.
A month ago we noted that the World Gold Council reported that Central Bank gold purchases rose in the first half of the current year compared with 2017, although once again the biggest reported increases were from Russia, Kazakhstan and Turkey which all seemed to be increasing their gold accumulations. The former two are both significant gold producers in their own right – Russia lying third in the global gold producer table and Kazakhstan 15th (see Top 20 World Gold Producers 2017)and Turkey also mines gold but falls outside the top 20. And now, since then, we have learnt of some significant purchases from countries with little or no gold production – namely India, Poland and, most recently Hungary which increased its gold holdings tenfold by adding 28.4 tonnes of gold in the first two weeks of the current month (see: Central Bank gold buying – New kids on the block). Whether Hungary has continued to purchase any gold since then is so far unreported.
The timings of the seeming acceleration of gold reserve increases is interesting. It coincides with the U.S.’s more aggressive attitude to trade and imposition of sanctions against countries like Russia which it deems to be opposed to it.. It also seems to impact those countries which wish to trade with the sanctions-hit economies in case they also become the victims of U.S. trade sanctions and imposed tariffs. This seems to be leading to countries attempting to reduce the dollar components of their reserves and perhaps replacing them with gold. The EU too seems to be taking a strong line against member states(Poland and Hungary are examples) which diverge politically from the consensus policies and rules. There is perhaps a fear here that the EU might break up if too many member states fall out with the EU hierarchy, which is probably why such a hard line is being taken on Brexit. A consensus deal is in both sides’ interests, but intransigence may well win the day, with adverse economic consequences for the U.K. and the EU as a whole.
The U.S.’s increasingly belligerent attitude to trade with China is yet another reason for our view that China is trying to reduce its dependence on dollar holdings in its reserves and perhaps using this money to buy more gold, but without reporting it to the IMF. Chinese officials and academics have intimated in the past that they would like to at least reduce the dollar’s dominant position in world trade and as a global reserve currency. It is already taking measures towards this by negotiating oil and other contracts in yuan (convertible into gold if wanted) rather than in dollars, which is another reason why it may be building its gold reserves as well.
Central Bank reserve increases are but one element in global gold demand, but an important one. With global production at the least plateauing (we’re not sure if it is actually reducing yet) and consumer demand likely to rise if only from population growth and general increases in personal incomes around the world, any continuing growth in global gold reserves will have a positive impact on supply/demand fundamentals. As we have mentioned before gold may be facing short term headwinds, but longer term prospects look to be ever increasingly positive.