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LAWRIE WILLIAMS: Russia’s gold swansong – another 9.33 tonnes added

After announcing that it was to stop gold purchases from April 1st, Russia’s central bank has announced what may well be its last addition to its gold reserves for some time of some 300.000 ounces (9.33 tonnes) in March.  This brings Russia’s total gold reserve to around 2,300 tonnes, the fifth largest national total according to the IMF, although one has one’s doubts about the 1,948.3 tonnes as reported by China which many believe is actually far higher.  China has a long track record of under reporting its gold reserves and then coming up with a big upwards adjustment at multi-year intervals.

We had speculated that the reason for the Russian central bank’s decision to cease gold purchases for the Russian banks, which in turn bought gold from the country’s big gold mining industry – the world’s third largest after China and Australia – was to boost the country’s payments balance with world markets given the big decline in the price of oil and gas – Russia’s biggest export.  Oil demand has been decimated by the global industrial downturn and national lockdowns which have hugely cut motor usage due to the coronavirus, as witness futures prices of West Texas Intermediate crude falling into negative territory yesterday.  While European and Asian oil prices have not suffered quite such a calamitous meltdown, the oil price is at a fraction of where it was pre-coronavirus.

The Russian central bank has been by far the largest individual gold purchasing entity in the central bank universe for the past several years. Thus the fact that it is no longer buying gold will drastically affect the central bank gold purchasing element in gold supply/demand patterns this year.  However a huge inflow into gold ETFs, given the general expectation of a rising gold price and the likelihood of further falls in equities due to the coronavirus effect on the global economy, will be more than counterbalancing the fall-off in Russian central bank gold purchases as long as the virus impact on the global economy persists.  This could go on for many months yet, and when the world starts to re-open for business, no doubt the oil price will pick up at least a little and the Russian central bank resume its gold purchasing programme.

There has, reportedly, been a plea, though, by Russia’s gold miners that the central bank should resume some gold purchases because there has been a huge interruption to transportation of Russian gold to world markets given the shutdown of much of the global air travel sector.  We somehow doubt that this will have any effect on the central bank’s position and we suspect that the gold producers will find means of getting their product to world markets in any case.

We commented a month ago when we reported on the nation’s February gold reserve increase of 12.44 tonnes that we questioned whether the nation could  keep up its current rate of gold reserve purchases for the foreseeable future given the enormous fall in the oil price remained to be seen and that the March volume announcement would be awaited with interest.   However, we also noted that the oil price fall is partly self-inflicted with Russia’s decision not cut oil deliveries in the light of a global over-supply situation. There may be an element of Russia trying to get back at the U.S. over sanctions in its oil export policy.  The huge fall in the oil price may also have been aimed aimed at putting U.S. shale oil producers out of business by making their operations uneconomic.

We also noted that the Russian central bank policy of increasing its gold reserves virtually every month for more than 10 years, looks to be paying off well economically.  This could prove to be even more so, particularly if pundits predictions for the gold price to take off as the world dives into recession come about.  It will certainly probably prove to have been a better choice for the nation’s reserves than the Swiss National Bank’s purchases of equities which will have crashed in value enormously over the past month and could, if our predictions are correct, crash much further in the weeks and months ahead.  The gold price is around 8% up year to date despite today’s heavy fall, whereas the Dow is down by nearly 20%, and could yet fall far further.

21 Apr 2020 | Categories: Gold, Russia

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