Russia’s gold buying spree continues as shift away from US dollar intensifies

Russia gold hoard Putin US dollar dumped
Russia is increasingly stockpiling its gold reserves in an effort to hedge against geopolitical risk and lower its dependence on the US dollar.

Russia’s gold bullion reserves are setting new records as the nation steps up its efforts to reduce reliance on American assets, namely the US dollar.

Known as a leading producer of the precious metal, Russia has now emerged as one of the largest official buyers of gold.

According to the World Gold Council, the Central Bank of the Russian Federation purchased 201 tonnes of gold in 2016, which at the time, was significantly higher than any other central bank of another country.

Russia’s gold purchasing spree has been on the rise ever since, with the council’s figures revealing the nation’s central bank bought 274t of the bullion last year, valued at more than US$11 billion.

Undoubtedly, Russia is emerging as a prominent player in the global gold market.

In February 2019, alone, Russia’s gold reserve holdings skyrocketed by 1 million ounces, with the country now accounting for 40% of central bank gold buying and 6% of global demand.

Meanwhile, on the supply side, the nation holds the title of the world’s third largest producer, boasting a 200-year gold mining history.

Russia gold buying mine output chart

However, for the first time, Russia’s gold purchasing has now surpassed its mine output.

Reserve diversification

Historically viewed as a safe-haven metal which investors turned to in times of heightened market volatility, gold has been an attractive buy for emerging central banks of late, such as Poland and Hungary, which are looking to diversify their reserves.

According to the council, central banks have kicked off 2019 by purchasing the most gold reserves since 1967.

“Demand was concentrated amongst emerging market central banks with diversification the key driver in the face of ongoing geopolitical and economic uncertainty,” the council said in March.

Particularly, Russia’s rise as a significant official purchaser of gold is being viewed by commentators and experts as a move to reduce its reliance on the US dollar and generally diversify its reserves.

The US dollar made up 46% of Russia’s total foreign-exchange holdings in mid-2017; however, this has now slumped to a mere 22%, with gold accounting for almost 20%.

Russia gold foreign exchange reserve chart

The country’s diversification strategy comes in the wake of French President Emmanuel Macron stating that European corporations and entities are too dependent on the US currency.

With the data highlighting Russia’s strategy to diversify away from US assets, analysts are increasingly using the term ‘de-dollarisation’ and are speculating Moscow will continue to stockpile gold to hedge against rising geopolitical uncertainty and potentially stricter US sanctions.

Russia, however, will remain dependent on its greenback reserves to some extent given many of its exports, such as oil, are dominated in the dollar.

Gold pricing support

Consultancy firm Metals Focus has predicted gold demand to remain strong this year, with prices set to average US$1,310 an ounce.

This compares to the Australian Government’s Department of Industry, Innovation and Science’s latest Resources and Energy Quarterly, which forecast prices of the safe-haven metal to increase by 0.4% in 2019 to average US$1,275/oz.

Ronald-Peter Stoeferle, managing partner at Liechtenstein-based asset manager Incrementum, stated that increased central bank purchasing has helped support gold and gold prices in recent years.

This sentiment was echoed by Adrian Ash, head of research at gold brokerage BullionVault.

“If it wasn’t for Russia’s central bank, last year would have been the worst year for gold buying in a decade, so it helped put a floor on the price,” he said.

Filip is the founder of Small Caps and provides analysis on the global economy, geopolitical matters, commodities and equities. He also has many years experience as a professional share market investor and trader.