Putins big bet on gold is paying off

Fine gold, indeed. Photographer: Andrey Rudakov
For years, Russia has been the worlds biggest sovereign gold bug: Even while gold prices were in the doldrums, it doggedly kept increasing its reserves. Now that gold is at the highest level since 2013, the tactic appears to be paying off.
The U.S. dollars dominance as a global reserve currency is commonly thought to result from the dearth of safe assets. Russia, however, recently has provided an example of how a sizable economy with the worlds fifth biggest international reserves can minimize dollar assets and still do well. So far, it doesnt have many followers, but gold buying by central banks is going up.
Since being hit by sanctions for its aggression against Ukraine in 2014, Russia has had good reasons to rethink the composition of its international reserve. While the European Union hasnt toughened its sanctions for almost five years, the U.S. has been doing it all the time. The Kremlin and the Bank of Russia consider the risk of further restrictions unpredictable and dependent more on U.S. domestic politics than on anything Russia does. In the 12 months since the end of September 2017, the central bank has more than halved the dollars share in its international assets and sharply increased the shares of the euro and the renminbi.
Putins big bet on gold is paying off

Breakdown of the Russian Central Bank's international assets
Bank of Russia
These data, the latest available from the central bank, show the share of gold slightly dropping, even though Russiaadded274 metric tons of the metal to its reserves in 2018, bringing its total reserves to 2,113 tons. Thats because other assets also increased as Russia sought to insulate itself from Western pressure and because in those 12months, the price of gold dropped by almost 7%.
Generally, though, the metals market performance has, for the most part, justified Russias stubborn trust in it.
Putins big bet on gold is paying off

The dollar value and the physical quantity* of monetary gold in Russia's international reserves
And so far this month, as the price of gold has soared by about 7%, it has added about $7 billion to Russias international reserves (assuming no newpurchases since the end of the first quarter of 2019). If the price increase holds, gold will account for some 20 %of Russias half a trillion dollars ininternational reserves,approaching the dollars share.

The dollar, of course, remains the worldsbiggestreserve currency, and gold and other currencies arent exactly displacing it worldwide. But then, the World Gold Council has noted an upward trend in net gold purchases by central banks that goes way beyond the Russian effort even through Russia remains the biggest buyer. In the first quarter of 2019, central banks bought a record amount of gold, 715.7 metric tons.
Putins big bet on gold is paying off

Central banks' net gold purchases
World Gold Council
China has its own problems with the U.S. and with the dollar. While it cant cut its enormous dollar assets as decisively as Russia has reduced its smaller ones, it has gone for a gradual reduction. And it has shown an increased interest in gold.
Putins big bet on gold is paying off

China's gold reserves
Other significant gold buyers include Turkey and India -- the latter, like China and Russia, a member of the global top 10 by international reserves.

Low U.S. interest rates, the Trump administrations unpredictable combativeness and insatiable appetite for debt, and geopolitical instability are making gold look like a safer asset than U.S. debt instruments. A few more years of this, and its possible that more countries international reserves will be structured like Russias.

President Vladimir Putins regime moved first among big reserve holders to phase out the dollar because it had the biggest reasons to fear the U.S. The current and future U.S. administrations should tread carefully to avoid giving others similar incentives to kick their dollar habit and follow the Kremlins example. While Russias economic management in general leaves much to be desired, the countrys approach to building international reserves is looking more and more prescient.

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