LAWRIE WILLIAMS: Russia keeps up the gold pressure

With economic growth perhaps even higher than that in the USA - at least according to President Putin - Russia appears to be shrugging off the effects of economic sanctions put in place by the USA and European nations.  And last month it once again added substantially to its gold reserves with the central bank taking in another 1.2 million ounces (37.3 tonnes).  This has already made 2018 a record year for increasing its gold holdings, with still another month to go,

Altogether the nation has added almost 265 tonnes of gold to its reserves so far this year and is heading for 300 tonnes for the full year if the current rate of gold purchases continues.  Interestingly this possible target looks to be in excess of the country’s total annual gold mine production - estimated by the major consultancies at around 270-280 tonnes - the world’s third largest after China and Australia.  It is possible that Russia’s 2018 gold output may have risen a little but probably not by up as much as around 20-30 tonnes.

The World Gold Council has already noted a significant upturn in global central bank gold purchases this year.  Last year it put this total at a little over 371 tonnes.  Central bank purchases in the current year have already exceeded this if we take the latest Russian figures into account. A number of countries have joined the gold purchasing bandwagon - some for the first time in decades. 

Our own estimate for the whole of 2018 puts world central bank overall annual demand at around 500 tonnes.  And that is under the assumption that the Chinese central bank has not been adding to its reserves since October 2016 as it has been telling the IMF, which, as we have often stated, almost certainly hides the true picture.  We assume China has been accumulating gold at at least the same rate as it did from 2009 to 2016 when it announced a massive 604 tonne increase all at once - so at least 100 tonnes a year.  As the world’s biggest gold producer, and as a nation that prohibits gold exports, it could easily surreptitiously be accumulating gold at well above that rate without unduly disturbing the markets.  But we have not taken this assumption into account in our global estimate.  If China has been buying gold the world gold reserve build-up could be significantly higher.

Ronan Manly, who conducts perhaps the most detailed analyses of the gold market, writing on www.bullionstar.com, comments thus: My personal opinion is that the Chinese State has a lot more monetary gold reserves than 1842 tonnes [the official level it reports to the IMF], and even more than 4000 tonnes, that they are constantly accumulating gold.”,

Manly doesn’t have any specific data to back up his assumption as the real level of Chinese gold reserves is a closely guarded secret, but the country does have a track record of surreptitiously building its gold holdings and only announcing the increases at multi-year intervals.  And this assumes that what China actually announces when it does report its reserve increases is indeed accurate data.  It could hugely understate the true position - or conceivably it could overstate it, but we think this unlikely.

Also, China’s officially announced way of circumventing the petrodollar in its payments for its much needed oil imports is to pay in yuan, convertible into gold - an appealing substitute for the U.S. dollar given the USA’s debt situation - which is another reason for it to build its gold reserves.  Indeed given Russia is probably the primary supplier of oil to China at present it would not be too surprising if China is the source of some of the Russian central bank’s newly acquired gold.

21 Dec 2018

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com