Russia beginning to hoard gold

Russia continues to aggressively accumulate gold reserves. Its gold holdings increased again in June as the crisis in the Ukraine and relations with the West deteriorated.

The Russian central bank officially increased its gold holdings by 16.8 tonnes to 1,094.8 tonnes in June, the IMF's International Financial Statistics report showed. In ounce terms, Russia increased its gold holdings by some 500,000 ounces to 35.197 million ounces in June from 34.656 million ounces in May.

Russia recently became the world's fifth largest bullion holder after the United States, Germany, Italy and France.

Importantly, China’s gold holdings, the world’s biggest store of wealth buyer of gold, haven’t been updated since March 2009 and remain at just 33.89 million ounces or 1,054.1 tonnes and just 1% of their huge foreign exchange reserves. More than five years later, it is likely China’s reserves have doubled or tripled as they quietly corner the global physical gold market.

It is important to note that there remain doubts as to the integrity of the gold holdings of the U.S. and concerns that other countries national gold reserves could be encumbered, loaned or sold in the market. Indeed, the Bundesbank is having grave difficulty in having its gold reserves returned from the Federal Reserve in New York.

So far in 2014, Russia has now bought substantially more than their entire annual gold production of nearly 1,500,000 ounces.

Russia was not the only central bank to diversify foreign exchange reserves, primarily held in dollars, into gold. Allies of Russia also bought gold in June. The central banks of Kazakhstan, Kyrgyzstan and Tajikistan, all Russian economic and military allies, accumulated gold in June.

Currency wars are set to intensify and the buying by the former Soviet states is another manifestation of this.

Russia’s foreign reserves fell $39 billion to $472 billion in June, data from the Russian central bank shows. Gold now accounts for 9.3% of the country’s reserves, according to the World Gold Council substantially less than the percentage of gold in fx reserves of the other leading gold owners.

Greece, Serbia, Mexico and Equador also diversifed and increased their gold reserves in June.

Turkey increased its holdings to 16.491 million ounces from 16.172 million ounces in May. It accepts gold in its reserve requirements from commercial banks and as payment from other sovereign nations such as Iran.

Germany, the second-biggest gold holder, lowered its holdings by a tiny 1,000 ounces to 108.805 million ounces from 108.806 million ounces.

Gold advanced the most in four months in June as fighting in Ukraine to Iraq and Israel boosted demand for a haven. Hedge funds and banks almost doubled net-long position in gold during June, U.S. Commodity Futures Trading Commission (CFTC) data show.

Gold’s safe-haven appeal is being driven by heightened tensions between Russia and the West over Ukraine and increasing concerns of financial and economic war and indeed of actual war.

Geopolitical risk in June likely prompted some central banks to further diversify their foreign exchange holdings and buy gold which is used to hedge against geopolitical, currency and credit risks.

Central banks continue to be buyers of gold at these attractive price levels. As sanctions, economic war and currency wars intensify we expect Russian and Russian ally buying of gold reserves and selling of dollars to intensify. Aggressive buying of gold and particularly silver by Russia will likely lead to defaults on the COMEX gold and silver futures exchanges and potentially an international monetary crisis.

About the Author
Mark O'Byrne

Mark O'Byrne is executive director of Ireland-based GoldCore.

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