Russia's Big Lesson For Gold Investors

December 30, 2014

Russia's giant gold reserves have done nothing to protect Russian savers from the collapse of the ruble.


This article first appeared on BullionVault and is republished here with permission.

Russia  has been the world's biggest central-bank buyer of gold in 2014, taking its national holdings into the top five worldwide.

But Russia's huge central-bank gold demand has done nothing to stop its currency and economy crashing, an awkward truth for hard-money fans in the West who think central-bank buying always signals strength and vigor.

Now some traders fear Moscow could dent the gold price and related ETFs like the SPDR Gold Trust (GLD) by selling some of its hoard to raise dollars and euros, and then selling them to buy rubles and try to support the currency's FX rate. Indeed, it seems one overexcited translation of a Russian website has even led a professional bank analyst to say it is "possible the Central Bank of Russia has started to sell off some of its gold reserves in December."

In reality, the CBR was still adding gold in November, and the odds are very slim that it will dare sell any gold yet, much less report it to the world: 1) because there is another state-owned stockpile of precious metals to get through first—palladium; 2) because even cold cash is unlikely to trump the political value of Russia's gold reserves.

It was late in 2005 when President Vladimir Putin publicly approved a plan from the Central Bank of Russia (CBR) to double Russia's state gold holdings. He set the target at 10 percent of total reserves by value, a level lost after the 1998 ruble crisis as Russia first sold down its gold holdings near 20th-century lows, and then as it hoarded up dollars and euros thanks to the surge in energy prices.

Putin in 2005 also noted how, alongside the country's huge underground reserves of crude oil and natural gas, Russia is rich in unmined gold. Proposing government support for new projects and refining plants, he told reporters, "I believe the role of the state in this field should be rather significant."

Moscow's "significant" role in gold came to the fore in 2014, both globally and for the domestic mining business. Today the CBR lags only the central banks and Treasurys of France, Italy, Germany and the United States in the gold reserves it reports to the world. Holding some 1,188 tonnes, now worth more than $45 billion at current prices, the CBR holds Russia's largest hoard since the last Romanov Tsar topped 1,200 tonnes, right before the outbreak of WWI and the Bolshevik revolution that killed him.

But while the CBR, Russian media and Western gold-bug websites have trumpeted this year's doubling of Russia's central-bank gold buying from the pace in 2013 (both 2009 and 2010 were bigger, however), the jump also came as Western sanctions over Ukraine and Crimea hit some Russian banks. That in turn effectively shuttered the world market to much of its gold mining output, now the third-largest after overtaking the United States' gold mine output for the first time in a quarter century.

Some 175 tonnes of gold were newly mined in Russia during the first nine months of 2014. Moscow meanwhile bought 114 tonnes, and word among Western bullion bankers is the two are closely related. Indeed, should sanctions be eased, one predicted in November, Russia's gold buying would likely pause too. Now in December, some Western gold traders think the CBR will start unloading metal as it sells down foreign reserves to try and bolster the ruble. Because, to quote the CBR, things are "critical".



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