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LAWRIE WILLIAMS: Russia still not buying gold – is global demand slipping?

Earlier this month a report in Russia Today noted that Russia’s foreign exchange holdings had risen for the second consecutive week to reach $587.6 billion, according to data released by the country’s central bank.  The holdings rose by $3.6 billion, or 0.62 percent, from October 30 to November 6. The growth was supported by “positive exchange rate revaluation and higher gold prices,” according to the report.  While this seems to be a remarkable result in the light of the coronavirus incidence in that nation, and somewhat counter to that being experienced in many others, Russia’s moves to reduce its foreign exchange holdings dependence on the U.S. dollar appears to have held it in good stead in terms of overall figures.

The media outlet noted that higher gold prices were partially responsible for the rise, despite the fact that Russia has not added to its gold reserves since April.  It has, as we have commented previously, been encouraging its gold miners to sell their product on the international markets rather than using it to bolster its own gold reserves.  This seems to have been paying off in helping it record positive current account balances unlike most western nations which are recording monthly balance of payment deficits.  This has taken place even though oil and gas prices have fallen back sharply and these commodities used to be Russia’s biggest export earners.  Perhaps the economic sanctions imposed at the behest of the U.S. are indirectly contributing to this seeming anomaly when compared with many other nations – and notably with the U.S. itself.

Nowadays, Russia is probably the world’s second largest gold producer after China, and output has been rising while that of the latter has been falling.  If this pattern continues, Russia could become the world’s largest gold producer within a few years and thus boost its export earnings further assuming it continues its current policy of not adding gold to its reserves and for its miners to sell their product on world markets..

It should be remembered though that the Russian central bank has been comfortably the largest purchaser of official gold for several years now, and its cessation of monthly gold purchases is one of the prime reasons that the central bank gold purchasing element of the annual supply/demand equation is likely to be far lower this year.  Indeed, were it not for major buying by the Turkish central bank, purchases of ‘official’ gold could have fallen to a very small amount this year, as some other major past buyers have reduced their own gold buying programmes, or dropped out of the  market altogether.  Last year central banks are estimated to have bought almost 670 tonnes of gold, but this year the grand total may well be only a little over 200 tonnes – quite a change.

Gold ETFs have possibly been the saving grace for global gold demand this year with nearly 1,000 tonnes of inflows up until mid-November. But these may well have been turning down in recent weeks.  Significantly SPDR Gold Shares (GLD), the biggest gold ETF of all, has seem around 35 tonnes of gold withdrawn so far this month, having reached a record level of close to 1,278 tonnes as recently as mid-October.  The total GLD holding as of this morning stood at just over 1,220 tonnes. still close to its all-time high, but there have been withdrawals on a majority of days so far this month.

All in all it looks as if indeed gold demand may be slipping a little – at least as far as some of the price drivers are concerned.  Middle Eastern and Asian demand seems to be a little constrained too, and  were it not for geopolitical events – not least the Presidential election disputes in the U.S. where claims of vote rigging and election fraud appear to this outsider to be becoming more ridiculous by the day – and the coronavirus, we’d be doubting our own forecast of rising gold prices into the medium to long term. 

As it is, the various vaccine announcements are doing a good job of improving sentiment that the virus effects may soon be behind us and are acting as another gold price suppressant – it’s taken another big knock today – but people’s optimism on this is probably misjudged.  But sentiment drives markets and unless something comes up to put a dent in this gold investors may be in for a torrid few weeks – or months maybe.  We still stand by our view that gold will move higher in the long term, but the current setback has certainly slowed the likelihood of any rapid advances down considerably.

23 Nov 2020 | Categories: Gold, Russia

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