Russians Make Largest Gold Purchase In 15 Years: What Does It Mean For Gold Investors?
Russian central bank purchases 1.2 million ounces of gold in September.
This is the largest gold purchase by Russia in over 15 years.
If the Russian central bank keeps up monthly gold purchases of this size then it will impact total annual gold demand.
There may also be significant political motivations in publicly announcing this large gold purchase.
A few days ago the Russian central bank released its gold reserve data that showed a tremendous increase in gold reserves during the month of September.
(click to enlarge) 
Source: ShareLynx
The surprise isn't that the Russian central bank bought gold reserves; it has been buying gold pretty consistently since 2007. The surprising aspect of the purchase that should really interest investors is the large amount of the purchases - 1.2 million ounces (valued at around $1.5 billion dollars) or around 37 tonnes of gold!
This is the largest purchase of gold that Russia has made in over 15 years and occurred as the Ruble plummeted during the month. There are a number of takeaways that gold investors should take from this monster purchase of gold.
First of all, the physical market for gold is not as large as many investors think. When it comes to gold derivatives, the market can be almost limitless as gold can be leveraged via these instruments to astronomical levels, but the physical market is very limited. With $100 million dollars an investors can easily load up on the GLD gold ETF in a matter of minutes, but it would take days or weeks to acquire that same amount of physical gold - even if we disregard the difficulties of transportation. It is simply not that easy to source physical gold that quickly and in the same amounts as can be done in the paper market.
Coming back to the Russian gold purchase, we can see that a 37 tonne monthly purchase is almost 1% of total gold supply.
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Source: World Gold Council Second Quarter Report
Remember this is total world gold demand - 1% is a huge number especially considering it was acquired all in one month by one entity. We don't expect Russia to continue to buy 37 tonnes a month, but if we do extrapolate that out it would come to around 500 tonnes of annual gold demand - around 12% of total gold demand. This would be equivalent to all other transparent annual net central bank purchases.
The point is that this is a significant amount of purchases compared to total demand and investors shouldn't ignore the possible impact on the physical market if Russia continues to buy at such elevated levels.
Sending a MessageInvestors also need to remember that when it comes to Central Banks, nothing is accidental. The decision to buy 1.2 million ounces and the decision to release this information was probably done at the highest levels of the Russian government.
We actually think the release of this information is much more important than the actual amount purchased. Let us not forget that nobody forces the Russian government to release its gold holdings, and many countries choose not to release any new gold purchase information even though it is clear that the government is buying gold (such as China). Additionally, nobody outside of the Russian government can truly audit the gold without Russia's permission, and thus Russia could release almost anything regarding its gold holdings without anybody to fact-check.
If Russia's only goal was only to accumulate gold, then there would be no need to release any over and beyond the 200-500 thousand ounces of average monthly gold purchases that the country has bought consistently since 2007 - even if they chose to buy more than that in a month. They could simply claim 500,000 even if they bought 1.2 million and then worry about the actual declared holdings later. But the fact that they chose to declare that they bought the largest amount of gold in over 15 years and DECLARE it was, in our opinion, done purposefully.
What was the purpose? To send a message to the United States that there could be consequences to the current sanctions and animosity towards Russia. Gold is the true Achilles Heel of the US Dollar because it is the only true alternative as a global reserve currency - it is no coincidence that the US holds more gold than any other nation. So if Russia wanted to really do damage to the existing US hegemony on the world's reserve currency, it would use gold as its weapon - and this may be a warning to the US that Russia can indeed do just that.
During the late 1960's and early 1970's, the French decided to convert their US Dollar reserves into gold and that was the last straw that forced President Nixon off of the gold standard and thus closing the last ties of the US Dollar to gold. The lesson that investors should take from this chapter in history is that one large nation that is intent on asking for physical gold, could cause havoc in the gold market.
According to the IMF, Russia has over $400 billion in currency reserves and if a mere $1.5 billion bought the largest amount of gold in 15 years, what would happen if Russia decided to accelerate purchase to $3 or $5 billion of physical gold per month? That would certainly be enough to move the gold market considerably and it could cause copycats to jump onboard and exacerbate the shortage and create chaos in the financial markets.
Of course, Russia wouldn't want to make chaos in the financial markets…right?
Well, not according to Hank Paulson, former US Treasury secretary who says that at one point during the financial crisis:
"Here I'm not going to name the senior person, but I was meeting with someone… This person told me that the Chinese had received a message from the Russians which was, 'Hey let's join together and sell Fannie and Freddie securities on the market.' The Chinese weren't going to do that but again, it just, it just drove home to me how vulnerable I felt until we had put Fannie and Freddie into conservatorship [the rescue plan for them, that was eventually put in place]."
For me this is pretty jaw-dropping stuff - the Chinese told Hank Paulson that the Russians were suggesting a joint pact with China to drive down the price of the debt of Fannie and Freddie, and maximize the turmoil on Wall Street - presumably with a view to maximizing the cost of the rescue for Washington and further damaging its financial health.
The point is that Russia may have more incentive to damage US financial interests than it did in 2007, and gold may be the best way to do it if Putin chooses this path.
Conclusion for InvestorsRussia's decision to buy 1.2 million ounces of gold in September is a very important thing for gold investors to note. First, if the Russian government decides to consistently buy 1 million ounces per month, it would add a new buyer that would be consuming a large amount of annual gold supply (over 400 tonnes or close to 10% of total estimated world demand) - enough to have a significant effect on the physical market.
Secondly, and in our opinion more importantly, this move may be a shot across the bow of the current financial system and the US Dollar regime. By making such a large monthly buy and revealing it in it a very public fashion, Russia may be making a statement that it will be accumulating gold in a big way - the only other asset that represents a challenge to the US Dollar's reserve currency status.
This issue may be resolved behind the scenes with a ratcheting down of US aggression over the Ukraine issue, but it will be very interesting to look at how much Russia accumulates during the month of October - and how much they declare.
If Russia is going to be using gold as a weapon, then investors would be foolish not to invest a bit in gold especially as Russia does have the financial strength to create significant waves in the gold market that could reverberate through the whole financial system.
Pay close attention to what Russia does in the physical gold market and if they start ratcheting up their gold accumulation - If so, then maybe the gold war has begun. |
