Over the last three years, Russia’s central bank has been buying gold at a breakneck pace. But it has significantly ramped up its buying since the beginning of 2014. With gold currently trading at its lowest levels since April 2010, many are wondering if Russia’s rapid accumulation of gold will impact short- and long-term prices.
The Effects of Sanctions Against Russia
The U.S., eurozone, and many countries around the world, including Australia, Canada, and Japan, imposed sanctions against Russia earlier this year, after Russia annexed Crimea in March. Further sanctions were levied against Russia after it backed pro-Russia separatists in eastern Ukraine.
The sanctions were imposed on Russian banks, companies, and the energy sector. Countries also placed travel bans on Russian politicians and business people. Shortly after the first round of sanctions was announced, Russia responded with its own sanctions, including food imports from the U.S.A., Canada, the eurozone, Norway, and Australia.
The sanctions against Russia, the most aggressive since the 1991 fall of the Soviet Union, have hit the country hard. Why shore up on gold? Central banks purchase gold as a hedge against economic and political uncertainty and hold it alongside other foreign exchange assets
The thinking is that the more gold Russia has, the better it’ll be able to withstand a financial crisis at home, in the U.S., or in Europe. The rate at which Russia is snapping up gold suggests it’s preparing for the worst.
Central Banks Around the World Buying Gold
Since 2008, in the wake of the U.S. financial crisis, central banks around the world have been increasing their gold reserves. In the third quarter of 2014 (ended September 30), central banks snapped up 93 tons of gold bullion. That represents the 15th consecutive quarter that central banks have been net buyers of gold.
Russia has been a stand-out. Since January, the country has increased its gold reserves by 10.5% (115 tons) to 1,149.8 tons
. That’s almost double what Russia bought last year (77.5 tons). For comparison’s sake, Russia added 75 tons to its gold reserves in 2012. Today, gold accounts for almost 10% of Russia’s total foreign reserves. Before the conflict in Ukraine, gold only accounted for 7.9%.
Russia’s Gold Buying and the Market
What has Russia’s growing interest done to gold prices? Gold hit a four-year-plus low in mid-November, falling to below $1,150 per ounce. But it spiked higher on November 18, the day after Russia’s central bank announced its third-quarter gold bullion purchases. Buyers jumped into the market, sending gold to a two-week high of $1,200 an ounce. Have gold prices bottomed? And if there is room for gold prices to run, how high will they go? There’s no shortage of geopolitical tension or economic uncertainty.
What Does this Mean for the Average Investor?
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“Jewellery in India, the US and the UK – the highlights of Q3 2014 global gold demand,” World Gold Council web site, November 13, 2014; www.gold.org/news-and-events/press-releases/jewellery-india-us-and-uk-highlights-q3-2014-global-gold-demand.