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The 2008 financial crisis marks the return of gold into the international
monetary system. It is also the beginning of currency wars. 2008 is also the
year central banks stopped selling gold reserves and instead started buying.
In this currency wars that will lead to a reset of the international monetary
system, five countries will play a major role but each in a different way.
The two largest players on opposite side are the United States and China. The
US is the only anti gold player and China the largest pro gold
player. However, Russia also has made gold a major weapon against the US
and especially since the West, under US leadership, imposed financial and
economic sanctions on Russia. The two other major players, because of large
ownership of gold and a much more pro gold attitude, are the European
Union/Euro Area and India (private ownership in India is a lot larger than
official gold reserves).
Symbolism and images play a very important role in geopolitics and as they
say a “picture is worth a thousand words”. It’s not usual to see in such an
open fashion a world leader show himself intentionally with a gold bar as we
have seen recently both the president of Russia Vladimir Putin and his prime
minister Dmitry Medvedev.
At the 2009 G8 gathering in Aquila, Italy, then Russian President and now
Vice President Dimitry Medvedev showed reporters an example of a gold coin of
a supranational currency, which he called a "united future world
currency". The Royal Mint of Belgium created the coin and a special gold
edition was presented as a gift to the G8 world leaders. Only President
Medvedev was more than happy to appear in front of the media holding one.
The golden symbol of the central bank of Russia is also no coincidence in
my opinion. Russian bullion expert Dmitriy Balkovskiy said that, “Elvira Nabiullina, Putin’s
recent appointee at the Bank of Russia, is familiar with Ludwig von Mises and
is well known in Moscow’s libertarian circles” (von Meses and libertarian
circles are pro gold).
Elvira Nabiullina, president of the Russian Central Bank
said in 2015 that, “Recent experiences forced us to reconsider some of our
ideas about sufficient and comfortable levels of gold reserves.” Also in a
recent CNBC interview, Ms. Nabiullina remarked on Russia’s
increasing gold reserves saying, “We base ourselves upon the principles of
diversification of our international reserves and we bought gold not only
last year but during the previous years. Our gold mining industry is very
well developed and it is ready to supply gold.” Dmitry Tulin, who manages monetary policy at the Central
Bank of Russia said recently that "The price of it (gold) swings, but on
the other hand it is a 100 percent guarantee from legal and political
risks" and that Russia is boosting gold holdings as defense against
“political risks”.
Russia’s President Vladimir
Putin said in 2011, "They [US] are living beyond their means and
shifting a part of the weight of their problems to the world economy… They
[US] are living like parasites off the global economy and their monopoly of
the dollar." He also recently told foreign journalists at the St.
Petersburg Economic Forum 2014 "For us [Russia and China] it is
important to deposit those [gold and currency reserves] in a rational and
secure way, … and we [China and Russia] together need to think of how to do
that keeping in mind the uneasy situation in the global economy." While Evgeny Fedorov, lawmaker for Putin’s United Russia party
in the lower house of parliament, said “The more gold a country has, the more
sovereignty it will have if there’s a cataclysm with the dollar, the euro,
the pound or any other reserve currency.”
With the help of a few charts let’s analyses Russia’s actions in the gold
market since 2008. For comparative purposes I chose to compare the five major
players in official gold reserves (US, EU, Russia, China and India) and two
small, one developed and the other developing countries, but interesting
cases: Switzerland and Lebanon. The chart below shows clearly that the
gold accumulation by Russia for its foreign exchange reserves started during
the 2008 crisis. From just 400 tonnes Russia more than quadrupled its gold
holdings in the last seven years.
 
According to Julian D. W. Phillips, Gold Forecaster, Vladimir Putin during his first mandate
as President Vladimir Putin instructed that Russia hold 10% of its reserves
in gold. As you can observe in the chart below Bank of Russia has achieved
this objective and holds now 13.1% of its foreign exchange reserves in gold
and is continuing to buy.
The next chart shows clearly that the trend of converting currency
reserves into gold reserves started in 2008 with the trend even accelerating
since Western sanctions were imposed on Russia in 2014.
The Russian central bank has been buying gold from local production but it
does not buy its entire local production. According to Thomson Reuters GFMS,
Russia’s gold mine production in 2014 was the 3rd largest with 262.2 tonnes
and according to Statista it is also the 3rd largest country in gold mine
reserves with 5,000 tonnes after Australia and South Africa.
In the chart below we can clearly see that Russia has increased its gold
mining production constantly since the collapse of the Soviet Union.
If we look now at the official gold reserves as a percentage of GDP we can
see that Russia has passed the US and is now in second place behind the Euro
Area in the group of the major five players in the international monetary
system with 2.8% vs the US with 1.8% and the Euro Area in first place with
3.2%.
However, if we look at the gold reserves from a different angle, we can
see Russia in third place on a gold reserves per capita bases with 9.5% far
behind the US and Euro Area.
Based on recent research it is my strong hypothesis that China, Russia and
India are targeting the US and EU holdings which are between 8,000 and 11,000
tonnes. I conclude that Russia but also China and India are working to join
the “gold 9000 club”.
All that being said I have to caution you that those figures are highly
contested. Both China and Russia could have a lot more gold under state
control but under a different institutional ownership waiting for the right
time to be transferred to the central bank. China did it in 2008 and 2015 and
Saudi Arabia did it in 2007 when suddenly just by an accounting transfer they
announced a sudden and large increase of official gold reserves. China buys
its gold reserves through the State Administration of Foreign Exchange (SAFE)
and the China Investment Corporation (CIC) and Russia through Gokhran. This
game of financial shenanigans of here you see it, here you don’t is not
played only by China and Russia but also by the US between the Treasury
Department, the Fed and the Exchange Stabilization Fund (ESF).
I expect the currency wars to intensify this year and both China and
Russia to play a major role in it. Both made gold an important instrument in
their war on the “hegemon” as the Chinese like to call the US dollar. Strong
collaboration between Russia and China has substantially increased last year
in many sectors including gold. I would not be surprised to hear that they
collaborate in respect to official gold reserves but for now it’s all
speculation from my part. China will start its Yuan Gold Fix in April based
on metric gold measurements and I expect Russia to join in. Moscow exchange
launched its first precious metals trading in 2015. The Moscow stock exchange
plans to transport precious metals from production companies, keep them in
its own stores and deliver to the buyer the next day.
You must know that Russia is not a novice in the gold market. During the
communist era the Soviet Union was a major player in the gold market first
through the Moscow Narodny Bank in London until 1970 and then through the
Wozchod Handelsbabk in Zürich. Wozchod Handelsbabk in Zürich was Russia’s
gold trading bank from 1966 until recently.
It is evident to me that Russia and China use gold to dethrone the US
dollar from its “hegemon” position and take away its “exorbitant privilege”.
Will it be this year? The Russians are impatient while the Chinese are very
patient. Events out of their control could however accelerate the process and
force an international monetary system reset sooner and not as smoothly as
China might want. I hear often, and to my surprise from highly educated
people, that neither China or Russia will dare to sell their US treasuries
and the dollar or link their currencies to gold. What they ignore
intentionally or by ignorance is that history is full of so called illogical
anti-textbook economic policy decisions by world leaders including in the US.
In this new cold war, treasury wars, currency wars, gold wars, etc.
anything is possible. The idea that they wouldn’t dare sell treasuries and
the dollar, is maybe valid in theory but not in reality. Accumulation of gold
both by Russia and China is not innocent. It is done with a very good and
well thought objective to eliminate the dollar’s “exorbitant privilege”.
Their biggest ally is the US itself through its state of denial of its
gigantic debt and deficit problem. Will it work? We will see, and I think
sooner rather than later. For now, I think Russia has succeeded to
substantially diminish the negative effects of Western sanctions, has avoided
international isolation and its gold strategy is well executed at least until
now by buying at low prices. Russia has a low public debt to GDP ratio of
18.4% and according to John Butler, author of The Golden Revolution and the Amphora Report “at current
market prices Russia’s gold reserves would back a whoppling 27% of the narrow
ruble money supply”.
Russian bullion expert Dmitriy Balkovskiy says, “The old Soviet Union viewed
gold and silver as strategic metals and a matter of national security” and
based on recent statements, public images and also actions, Russia today does
it too.
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