Top gold investment report, the World Gold Council’s Gold Demand Trends for Q2 was released earlier this week; the news that a 15% year-on-year increase in demand for gold bars and coins from European investors dominated headlines. However, it was the focus on Russia’s gold market which drew our attention and inspired us to look further into the world’s largest country’s love for gold.
It’s possible Russia could be seen as a poster child for a country’s approach to the gold market. Not only is the central bank buying at record highs (3 years ending in June this year, Russia has increased its gold holdings by 10.2 tonnes per month) but we are seeing increasing gold demand from citizens.
The WGC reports that in the 5 years to June 2012, official gold purchases exceeded 500 tonnes – the largest increase worldwide of official gold reserves over the same period. Meanwhile jewellery purchases, the most common form of private gold investment, have increased by 8.7% per annum since 2002.
Preparing for a gold future?
For stories of Russia’s economic history, you do not have to look too far back in the text books. Whilst we so often cite the hyperinflation of the Weimar Republic, we rarely mention the hyperinflation experienced by Russia in the late 1990s. Between 1997 and 1998 average annual inflation rose from 11.0% to 84.4%, this saw the gold price more than double.
Having experienced dramatic devaluations in the past, it is unsurprising that many believe the Russian government, like China, is looking to have some form of gold-backed currency in order to protect them from further international economic crises. This is also the policy action that Jim Rickards took, when charged with playing Russia during previous rounds of the Pentagon’s Financial War Games simulations.
Alexei Kudrin, Russia’s former finance minister told a conference that, with the eurozone crisis expected to blow up within a year, Russia will continue to add gold to its reserves. "The time (for avoiding it) has gone" – Russia is putting up the sandbags for this financial blast of which they are very much in the fallout zone.
The WGC report that Russia continues to advocate an increase in gold’s role in the monetary system. In 2009 Russia’s Chief Economic Advisor preceded Robert Zoellick in stating his preference for gold bullion to be included in a world currency made up of a basket of currencies.
The central bank seems convinced of gold’s increased role on the international monetary stage having smoothly moved from net sellers to net purchasers. Currently the country’s official gold holdings only represent 9.2% of total reserves, the WGC expect this to increase as the oil price rises. In order for gold reserves to return to peak gold holdings as seen in January 1995 when they represented over 60% of total reserves, an ‘incremental demand of nearly 5,000 tonnes at today’s gold price’ would be seen.
The WGC note that that the CBR "increased its gold purchasing pace as the financial crisis and sovereign debt issues worsened." Having already suffered from the fallout of the Asian financial crisis, when the economy saw a dramatic decline in the export of their most valuable source of capital outflows, oil and metals, Russia seems to be determined not to go down again as a result of the Euro and coming dollar crisis.
At a time when the BIS are looking at reappraising gold as a risk-weighted tier one asset, Russia is ahead of the game; the WGC report that as of August last year banks are now able to use gold as collateral for up to 90 days at a rate of 7%.
Russia has long been chastised by the West for her attitudes towards the rule of law, property rights, the Atlanticist states, but you have to say fair play on one point – Russia has been calling "bluff" on the dollar centric financial system and its (mis)management for purely US, and not global, interests for some time.
Private gold investment
It is not just the official sector which is aware of the need to invest in gold. The WGC points to the "burgeoning middle-class" seen in Russia thanks to its booming oil industry which has increased 12-fold in the last 20 years. The middle classes suffered greatly during the financial crisis of 1997-1998 seeing their savings wiped out by hyperinflation and the collapse of the banking system. Confidence in banks to manage customers’ wealth seems to have been lost with the last crisis.
This new middle class is helping to contribute to the increased demand for gold, particularly in the jewellery sector. Having previously fallen in the nineties, on account of the financial crisis, private gold investment demand is now experiencing a boom. The WGC expect this to continue to grow alongside the forecast economic growth.
Gold’s future in Russia
Ferdinand Lips in Gold Wars cites Russia as the best example of a country which has gold in the ground but this does not automatically mean the nation is a wealthy one.
Lips believes it to be crucial that gold-producing nations such as Russia and South Africa need to understand the indispensable nature of their resource in the coming new financial order. When they understand this they will have to fight to protect their wealth. However, at present the country is expected to continue to contribute significantly to the global gold supply. Earlier this month the government announced measures to ease access to gold reserves for companies with foreign capital.
Both the CRB’s and the citizens’ behaviour towards gold demonstrates a shift in not only wealth, but economic prowess. China is ahead of Russia in terms of gold accumulation and preparing for a collapse of the dollar. These emerging economies are slowly but surely transferring pretend wealth into real wealth.
Russia has what the world needs – vast energy and mineral wealth – and continues to experience a resource boom. How we pay for Russia’s resources is a serious issue. Of course at the moment oil is paid for in dollars, but with confidence in the US currency continuing to whither, what will Rusiians demand we buy our future oil supplies in?