Bank of Russia Is the World’s Largest Buyer of GoldRussia is hoarding gold and the Russian central bank is now the world’s largest buyer of gold. But why? In 2010, central banks around the world went from being net sellers of gold to being net buyers of gold. Following the U.S. financial crisis, central banks started to accumulate gold as a hedge against economic and political uncertainty. They also bought gold to back up their currency so it could compete against the U.S. dollar, which is the world’s reserve currency. Since the 1970s, the U.S. dollar has been the world’s reserve currency used to trade oil and other commodities and products. This has created a huge demand for the U.S. dollar. But the U.S. Financial Crisis put the notion of the greenback as the world’s reserve currency into jeopardy. If the world’s biggest economy can collapse then how safe is the U.S. dollar? To wean itself off dependency on an unstable currency, global central banks have been buying gold—none quite as fast as Russia. In September, Russia’s central bank added 16.5 tons of gold to its stockpile. This represents the 20th straight month of that the Russia central bank has been the biggest buyer of bullion. Russia is now home to the seventh largest gold reserve in the world with 1.5 million tons of gold, representing 16.5% of the country’s total reserves.1 Russia’s economy has been in a tailspin since the U.S. and E.U. imposed sanctions on the country after it invaded Crimea back in March 2014. The sanctions were supposed to bring Russia’s economy to its knees. It didn’t. Instead, Russia became better friends with China and has been weaning itself off the U.S. It has also been hoarding gold in an effort to shore up the ruble. The ruble, just like the U.S dollar, is a fiat currency, which means that it is money that is deemed legal tender but isn’t backed by anything.
Bank of Russia Strengthens Fiat Currency with Hard AssetsBut Russia is changing that. The Russian government has been converting state rubles into gold assets. From 2006 to 2015, Russia’s state holdings of gold tripled. Meanwhile, the U.S. continues to pile on the debt with no end in sight. The U.S. is currently $20.0 trillion in debt; it’s closer to $200.0 trillion when you factor in debt and unfunded liabilities like Social Security, Medicaid, unemployment, and food stamps. If the U.S. economy crashes, countries around the world that are holding U.S. debt (in the form of bonds) will be left with worthless money. Countries, like Russia, that are hedging against this kind of economic uncertainty with hard assets like gold and silver will be in a much better position economically. What does this mean for investors? Russia’s hoarding of gold will have an impact on everything from gold and silver to mining companies to currencies and commodities.
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- “Latest World Official Gold Reserves,” World Gold Council, last accessed November 17, 2016; http://www.gold.org/research/latest-world-official-gold-reserves.