– Gold and FX reserves are “additional financial cushion” for state in face of “external uncertainties”
– Russia bought another 77 tonnes of gold in Q3
– Ruble volatility does not create risks for financial stability in Russia
– Russia intends building fx and gold reserves to $500 billion in coming years
– Gold is a “100% guarantee from legal and political risks”
Russian central bank governor, Elvira Nabiullina spoke about Russia’s gold and foreign currency reserves today saying Russia intended building them up to $500 billion in the coming years. More importantly, she confirmed that Russia continues to see gold reserves as an important monetary asset – in her words as a “financial cushion.”
According to Russian news agency TASS, Nabiullina said: “Regarding gold and foreign currency reserves, we have the desired benchmark of $500 billion, and not in the three-year term, it could be 5-7 years and more.”
Reuters reported that Russia does not have a target for the volume of gold in its reserves: “Nabiullina also said the regulator did not have a set target for the volume of gold in its reserves.”
Russia like other central banks, sees gold reserves as a form of monetary hedging and financial insurance: “We believe it is necessary in terms of creating additional financial cushion for the state in the face of such external uncertainties,” Nabiullina said.
Russia and China have been the leading official sector gold buyers over the last 15 years. Russian central bank officials have previously said that Russia views gold bullion as “100% guarantee from legal and political risks”.
Russia is now the seventh biggest holder of gold reserves after the U.S, Germany, the IMF, Italy and France and the rising gold power China. Russia has more than tripled its reserves since 2005 and holds the most gold bars since at least 1993, IMF data shows.
Gold remains a large part of many central banks’ reserves, despite stopping backing paper and the electronic currency with gold in 1971.
Nations globally have been increasing their gold holdings in recent years, a reversal from two decades of selling. China, Kazakhstan, Ukraine and Belarus are among other nations that have been accumulating gold.
Russia has been steadily buying bullion since 2007 and the advent of the global financial crisis. Russia was accumulating gold even prior to tensions with the West and international sanctions over the Ukrainian conflict.
In the event of relations further deteriorating with the U.S., UK and certain EU countries, we would expect Russia to intensify their selling of dollar reserves and accumulation of gold which would be very supportive of gold prices. Indeed, were Russia to become aggressive in this regard and currency wars intensify, Russia may elect to intensify its gold buying which would put pressure on an already strained small, “fractional reserve” physical gold market.
Central bank buying remains strong with banks accumulating an impressive 175.0 tonnes of gold in the third quarter – the second highest quarter of net purchases on record.” Russia was again the largest single buyer with 77 tonnes of gold added to its reserves.
Gold is “additional financial cushion” for all who own it in the face of the considerable “external uncertainties” of today. In the next financial crisis, physical gold held outside the banking system in safe vaults in safe jurisdictions will prove to be a “financial cushion” to individuals, companies, pension funds, family offices, and indeed nations.
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Today’s Gold Prices: USD 1083.75, EUR 1006.60 and GBP 712.08 per ounce.
Yesterday’s Gold Prices: USD 1087.60, EUR 1014.03 and GBP 716.21 per ounce.
Gold prices have slid in 10 of the last 11 COMEX trading sessions (see chart above) after yesterday’s very marginal higher close. Gold has fallen back to the lowest level since early August – half decade lows in dollar terms. It looks very oversold on a few measures and is due a bounce.
As we wrote this week, the upside potential for gold and silver far outweighs the downside risk. On a 5 to 10 year time horizon, the outlook is very positive.
However, in the short term, gold was badly damaged technically again this week and further weakness is quite possible.
$1,000 to $1,050 per ounce on the downside is possible and previous resistance could become support. At the top when gold was over $1,900 and there were some really extreme bullish price calls we warned that gold was due a sharp correction and that gold could replicate the 1970s bull market when gold fell nearly 50%. At $1,085 per ounce, we are near those levels now.
With gold close to a half decade low, we are seeing some of the worst sentiment towards gold from the retail investment public in many years. From a contrarian perspective that suggests that we are close to a bottom.
Gold will likely bottom even before the Fed announces its interest rate policy decision on December 15/ 16. If there is a rate hike gold might see one last bout of weakness. Although that should be shallow and short given the scale of losses in last three weeks.
The Fed matters in the short term but it is only one factor. A far more important factor is actual physical supply and demand and these factors are very supportive for gold (see Gold Bullion Demand Surges 27% In Q3 – New Chinese “Buying Spree”) as we had towards the increasingly important Chinese New Year.