Russia's giant gold reserves have done nothing to protect Russian
savers from the collapse of the Ruble...
RUSSIA has been the world's biggest central-bank buyer of
gold in 2014, taking its national holdings into the top five worldwide, writes
Adrian Ash at BullionVault
in a story first published at Forbes.
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
over-excited 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. First because there is another state-owned stockpile of precious
metals to get through first, palladium. Second 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% 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
hoovered up Dollar 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 that "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 treasuries of France, Italy, Germany and the United
States in the gold reserves it reports to the world. Holding some 1,188
tonnes, now worth over $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 which 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".
In the third week of December Moscow put $7 billion of its $373bn in
foreign cash reserves on the slate, and analysts think a further $70bn of Dollars and Euros could be readied to
sell for Rubles. The plunge to 5-year lows in crude oil – which together with
natural gas accounts for three-quarters of Russia's exports and half
of all government revenues – meantime shows no signs of reversing any time
soon. State-owned energy giant Gazprom might fire 15-25% of its 450,000 staff. Yet Moscow has
said it doesn't plan to cut the nation's 2015 oil output targets, joining the
Opec oil-cartel states in leaving the market over-supplied for next year.
With interest rates now hiked to 17% – the highest since 2003 (but still way
off the spike to 150% following Russia's 1998 bond default) – Moscow is
also taking the next classic step in a currency crisis and applying exchange
controls, despite Russian Prime Minister Dmitry Medvedev hinting
Wednesday that the CBR wouldn't try to stem capital flight. Many large
corporations owe his boss and rival, Vladimir Putin, a favor or three. Now
they're being told to swap the Euros and Dollars they own for Rubles from the
central bank. Western sanctions are also helping slow the outflow of money, a
perverse outcome for Western politicians.
Stuck inside the rocky Russian currency, Russian citizens – who have now
been here 3 times in 20 years – are taking their cue to buy whatever they can
grab with spare cash before it sinks in value again. Cartier watches, the cheapest iPhones in Europe from Apple (NASDAQ:AAPL) and
mis-priced goods from Ikea have all flown off the shelves. For the speculator
who can raise a loan, real estate will also appeal, as it does in any currency
collapse.
Those Russians able to move money outside the country are looking to hard
assets abroad as well. Web traffic to BullionVault.ru
– the Russian language interface of our physical gold and silver exchange
online – has doubled since the start of November on the weekly average, with
a huge spike during Tuesday's 20% Ruble crash and 17% slump in the Russian
stock market (AMEX:RSX). Existing Russian users of BullionVault
have meantime raised new bank deposits sharply this month, adding to the
half-million Dollars they transferred between September and November to buy
and own physical bullion vaulted in Switzerland and Singapore.
Private Russian gold buyers don't need telling that Moscow's huge state
reserves have done nothing to defend private savings so far. Don't expect
that hoard to be used for defending the Ruble any time soon either. Far more
likely is the sale of whatever palladium now sits in government stockpiles
instead.
Palladium is primarily used in catalysts to reduce emissions from
automobile engines. It has no history as money, and 91% of annual demand
today comes from productive and industrial uses, rather than investors or
jewelry consumers. Russia is the world's largest palladium mining nation, and the
government holds untold quantities, bought from domestic miners but
unreported in public. Trying to guess how much is held by Gokhran, Russia's
'State Precious Metals and Gems Repository', analysts and traders had thought
Moscow's government stockpiles were run down near zero after that secretive
agency's annual sales fell from 31 tonnes in 2010 to just 5 tonnes last year.
This September Russia's largest palladium miner, the privately-held
Norilsk, said it was in talks to buy palladium from the government, meeting
with the central bank rather than Gokhran and putting the
"opportunity" at $2 billion – some 80 tonnes at current
market prices of $795 per ounce.
"Palladium is not a gold and currency reserve," Norilsk's CEO
Vladimir Potanin had already told reporters this spring, ahead of the proposal.
"It should be sold rather than bought by the state. We could help, and
not only by buying those volumes, but by marketing the deal."
The CBR needs foreign currency to sell in the FX market to try and defend
the Ruble. Whatever palladium it apparently holds has already found a ready
buyer in Norilsk. Selling palladium also offers the advantage oftaking a 10% gain in US Dollar terms for 2014, with
prices at the highest year-end level since the huge spike of 2000.
Selling gold, in contrast, would mean selling a prestige asset – the ultimate "crisis money" as former US Fed
chairman Alan Greenspan put it this fall — near 5-year lows in Dollar terms.
That would signal that this Ruble crash is indeed the ultimate crisis for
Putin's Kremlin, as well as denting Moscow's claim to be "leaving the Dollar dictatorship" which rules global
trade by pricing near-everything in US money. That in turn could tarnish Putin's "strong man" image and huge approval
rating at home as well.
Fact is, Moscow's gold strategy over the last decade has made the metal a
key symbol of Russia's revived strength and stability. The political power of
today's huge CBR gold reserves is worth way more to the Kremlin than its cash
value. The lesson for Western investors expecting gold to protect their
money, meantime, is to buy it themselves. Even record-high central bank
holdings won't help.
