LAWRIE WILLIAMS: Russian gold reserves fall, but central bank buying still positive
The Russian central bank updates its foreign reserve position religiously on the 20th of the month when the 20th falls on a weekday and the current month is no exception. Russia has gone from being the world’s largest gold purchaser to ceasing its gold purchases altogether from a year ago in favour of encouraging its gold miners to sell their output on the global marketplace.
This has been in response to the dramatic falls in oil and gas prices, previously Russia’s biggest export income earners, with the price weakness putting a big dent it the country’s balance of payments current account. As the world’s second, or third, largest gold producer (it is currently vying with Australia for this position) – with the target of becoming the world’s No. 1 by the end of the current decade – it has been able to replace the oil and gas income fall with gold exports instead. That has kept its economic balance relatively healthy despite the effects of U.S. and European sanctions in response to its annexation of Crimea, and its support of the uprising against the Ukraine government in the Donbass region of that latter country.
The latest figures for Russia’s gold reserves at end-April show a relatively insignificant fall of 3.1 tonnes (compared with an overall holding of 2,292 tonnes). This is the second month this year that the nation has reduced its gold reserves by a similar amount. However these falls in reserves seem to be small enough to suggest they may just be accounting adjustments.
Russia seems thus to be maintaining its gold reserves at a high level, while reducing its reliance on U.S. dollar-related securities given that it retains a worry that the U.S. might cut off its access to dollar funding in some extension to the current sanctions imposition. Increasingly the U.S. appears to be attempting to weaponise its position of controlling the world’s de facto reserve currency against those nations with which it has serious political disagreements. This has been causing some countries to conduct bilateral trade using curremcies other than the dollar, thus further weakening U.S. control over global trade.. Significantly it now appears that Russia holds more of its forex reserves in Euros and Gold than in the dollar.
We have speculated before that now oil and gas prices have regained at least some of their strength, and the oil and gas balance of payments problem has thus diminished somewhat, the Russian central bank might resume some gold purchases, but so far there’s no sign of that happening.
Last year the fall in Russian gold purchases was largely replaced by Turkish buying, but this buying seems to have fallen away this year, although a large purchase by Hungary of 63 tonnes in March redressed most of this balance in Q1. Hungary’s move to increase its gold reserves was the biggest individual central bank purchase since Poland acquired 94.9 tonnes in June last year.
Strong levels of central bank gold buying over the last few years have been helping keep the gold price relatively strong, but with first China, and then Russia, (the two biggest gold accumulators according to data submitted to the IMF) both ceasing gold purchases one should anticipate lower levels of central bank buying this year., with net selling having taken over in Q3 last year, There was still a lack of buying at the beginning of the current year, but this now seems to be turning round, with Poland announcing in March that it would be looking at buying a further 100 tonnes of gold in the future and with India and Serbia increasing their holdings..
Even so, according to the World Gold Council (WGC), central bank buying will be lower this year than last, but should still end the year in positive territory. However gold investors might be happy that the fall in central bank buying seems to be coinciding with a pick-up in gold ETF deposits after a few months of ETF outflows, which should more than cancel out any fall in demand provided the current ETF inflow position holds up.
With the prospect of a rising gold price through to the year end, gold demand looks more likely to hold up than to fall. Consumer demand for gold also appears to be picking up well in China, while Indian demand has also been running much higher year to date, although whether this higher rate of demand can be maintained in the light of the worrying coronavirus spread in the world’s second most populous nation, remains to be seen.