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LAWRIE WILLIAMS: Russia halts gold purchases for the time being

One of the strong factors supporting the price of gold over the past few years has been the strength of demand for the yellow metal from the world’s central banks.  Of these the Bank of Russia has been the leader in this, averaging purchases of about 200 tonnes per year over the past four years.  But now, in an announcement at the beginning of this week, the central bank said that it would be ceasing such purchases from the start of the current month – at least until further notice,.

There are various theories out there as to why the bank is cutting back its gold purchases.  Our favoured reason is that with the price of oil falling to a little over $20 a barrel from nearer $60 at the beginning of the year, and with oil and gas being Russia’s biggest export earner, it will now be able to allow its miners to replace some of the resultant current account shortfall by increasing gold exports to make up some of these lost export earnings, thereby helping the nation’s economy.  Russia is the world’s third largest gold producer – and vying with Australia for second place after China.  In 2018 it produced around 300 tonnes of gold and is believed to be expanding output from its mines.  The nation’s central bank had been taking a good proportion of this domestically produced gold into its reserves, but now Russian gold producers will be free to sell their output on the open market.

So far this year the Russian Central Bank reported that it bought 8.1 tonnes of gold in January this year and 12.44 tonnes in February.  It will release the data on its purchases in March in just under three week’s time.  It currently holds around 2,300 tonnes of gold, equivalent to around 21% of its total foreign exchange reserves having largely replaced its U.S. dollar related holdings over the past couple of years as a defensive measure against possible U.S. financial sanctions.  Russia is currently the world’s fifth largest national holder of gold as reported to the IMF, not far behind Italy in third place and France in fourth.  However it is widely believed that China may actually hold more gold than it reports and thus Russia could actually be only the world’s sixth largest national gold holder, with China, in reality, one of the world’s top three gold holders. 

Other theories as to why Russia is ceasing its gold purchases for the time being, according to ZeroHedge, include that the size of its holding is now seen as sufficient for its needs; the easing of the current tightness in global gold markets which would help enhanced gold ownership, potentially supporting the case for further de-dollarisation; and to give Russian gold mining companies scope for increasing their profitability given a likely rise in the global gold price.  The likelihood of Russia falling out of favour with gold is largely discounted as being highly unlikely.

Another theory is that Russia is hugely aware of the enormous debt situation which has been built up by the USA and reckons on a big depreciation in the dollar as a currency as a result.  This would likely lead to a massive gold price increase in U.S. dollar terms (in effect a dollar devaluation) leaving the Russian Federation with a more than adequate forex reserve level by comparison.   The huge hit to the U.S. economy from the coronavirus would serve to make this an even more likely occurrence.  We are already seeing a downturn in the dollar index from this.

02 Apr 2020 | Categories: Gold, Russia

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