LAWRIE WILLIAMS: Russian central bank still cutting back on gold purchases?

The Russian central bank said it added some 200,000 troy ounces of gold (6.22 tonnes) to its gold reserves in January – the lowest monthly increase for 9 months, but the same amount as in January last year.  It is thus still perhaps too early to say whether this is an indication of further cutbacks in the Russian central bank’s annual level of gold purchases, although last year did see an annual fall to 158.5 tonnes – almost 120 tonnes less than in 2018 (although in 2018 the nation recorded its highest recent annual gold purchase total of around 275 tonnes compared with around 200 tonnes in each of 2016 and 2017).  We had thus speculated that last year’s lower total might be, in effect, an adjustment to balance out the 2018 increase and bring the recent yearly average back towards the 200 tonne level.  It will take a few more months of gold purchases to see whether the latest figures do represent a general reduction in annual gold purchases or whether we might yet see a similar total to last year, or lower.

A fall in annual gold purchasing activity, if that is what it is, could be coming about for two reasons.  First and foremost is perhaps that the central bank has now been successful in cutting the U.S. dollar-related amount of its foreign exchange reserves to near zero and no longer needs to replace sales of U.S. treasuries with gold purchases.  Secondly the country, which has been increasing new mined gold output to vie with Australia for the world No. 2 gold producer slot, is looking for its gold miners to sell more gold on the world market.  This would further help improve its current account (balance of payment) surpluses.  Despite U.S. and EU imposed sanctions, Russia’s domestic economy appears to be growing, while that of many other world top economies – notably that of the U.S. -  are sinking ever further into deficit.

Speaking of U.S. sanctions, one of the reasons Russia has been ditching U.S. Treasuries and building gold reserves – they represent the World’s fifth biggest official gold holding, very close behind Italy and France, the world’s No.3 and 4 gold holders respectively – is due to fears of the U.S. imposing financial sanctions and freezing Russia’s dollar assets.  The U.S. has shown its willingness to conduct financial warfare of this type against other states it feels are hostile to it (like Iran), but Russia reckons now that it won’t be worth the U.S. making this kind of move against it if there is little in the way of U.S. related assets to attack.

China is another nation which has been reducing its U.S. dollar-denominated holdings, but it has an awful long way to go if it is planning to reduce them down to anywhere even close to zero – and if it were to do so this could be taken as a declaration of financial war as it would destabilise the U.S, currency and economy.  Like Russia China appears to be nervous about the possible weaponisation by the U.S. of its financially dominant position globally, and also by the degree of debt the U.S. has managed to run up.  China is reporting zero increases month on month in the volume of its gold reserves, but many, including ourselves, believe that the zero increase reports are something of a fiction as they have proven to be in the past when years of announced zero monthly increases have suddenly given way to big gold reserve rises, which must have been built up over the zero years.  However, for the moment China has the Ncov-19 virus effects to worry about, which is severely affecting its domestic economy.

24 Feb 2020

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