Russia has added over 40 tonnes of gold to it’s reserves in October, according to the latest data released by the Central Bank of Russia. Since 2006, the year in which the country started to accumulate gold, they never added such a great amount of gold as last month. By adding 1.3 million troy ounce (40,43 tonnes), the total gold reserves of the Russian Federation reached 1.583,17 tonnes. Valued against a gold price of $1.265 per troy ounce, this gold hoard equals a market value of $64,43 billion.
The past ten years Russia has quadrupled it’s gold reserves from less than 400 ton almost 1.600 tonnes. And while the precious metal represented less than 4% of the total reserves, today it is about 16,5% of the total reserves. The shift from foreign exchange reserves to gold is a process which started in 2006, but it gained more speed during the financial crisis of 2008 and the crash of the price of oil in 2014.
Russian gold reserves quadrupled since 2006
International reserves of Russia
From currency to gold reserves
Russia wants to reduce it’s dependency on dollars and therefore it keeps diversifying away to euro’s and gold. Last year Dmitry Tulin, governor of the Central bank of Russia, stated that only gold reserves are a one hundred percent insurance against political and legal risk. This advantage is great enough to overcome the volatility in the price of gold.
In the first ten months of this year Russia has added 167,73 tonnes of gold to it’s reserves, which equals to little over 200 tonnes on an annual basis. That would be on par with the record gold purchase of 206 tonnes in 2015.
Annual purchase of gold by Russia since 2006
Central banks buy gold
The Central Bank of Russia is the largest gold buyer of all central banks. The country takes the sixth position on the list of countries with the largest gold reserves, behind the United States, Germany, Italy, France and China. Other countries buying lots of gold in the last couple of years are China and Kazachstan.
Central banks became net buyers of gold in 2010 and are still adding precious metals to their reserves. According to the Official Monetary and Financial Institutions Forum (OMFIF), gold will make a comeback as an important monetary reserve.
This article is brought to you by Hollandgold, precious metals dealer in the Netherlands. For more information on buying gold, you can contact them at [email protected] or by phone +31(0)88-4688400.
The Central Bank of Russia keeps adding gold to their reserves, despite the challenges posed by the economic crisis. According to the latest numbers published by the central bank, they added 21,7 tonnes to their reserves in the month of December. Ranked by total gold holdings, Russia holds the sixth place with a total hoard of 1.415 tonnes of yellow metal.
Data from the World Gold Council shows that Russia added a total of 206 tonnes to their reserves last year, after purchasing 173 tonnes in 2014. When Russia started buying gold in 2006, the central bank held less than 4% of their total reserves in physical gold bars. But with a total hoard of more than 1.400 tonnes, the percentage of gold has increased to more than 13% by December 2015. The increase is not only due to adding weight, but also due to the monthly revaluation of gold reserves to the market price.
The Central Bank of Russia wants to increase their reserves, because the precious metal is regarded as a safe haven without political counterparty risk. The precious metal is seen as a backup asset in the international financial and monetary system and is held by central banks all over the world. Since the start of the financial crisis in 2008, central banks have been net buyers of the precious metal.
Last Friday we wrote about China adding 19 tonnes of gold in the month of July. While that is an interesting development, it is just as remarkable to find out that China started marking it’s gold reserves to market value!
In the past, the gold reserves were merely being reported in weight (troy ounces), but with the adoption of the IMF accounting rules China was required to express all reserves (including their gold hoard) in dollars. In this article we briefly explain what has changed and why it is so important to see China marking it’s gold reserves to market value from now on. Let’s take a step by step approach to this topic…
Why did China adopt the IMF accounting principles?
The central bank of China wants to include the yuan in the SDR, a form of reserves issued by the IMF which can be redeemed in dollars, euro’s, British pounds or Japanese yen. The SDR therefore acts as a substitute (or supplemental) gold reserve on the central bank balance sheet.
The Chinese yuan is not included in the SDR at the moment, despite being the second largest economy in the world. China also made a lot of efforts to improve the convertibility and usability of the yuan in international trade and commerce, for example with variouscurrencyswaps and the opening of clearinghouses throughout Asia and Europe. These clearing houses make it easier for trading partners to transact in yuan directly.
China wants recognition of it’s status as a rising superpower, so it wants to hold a share in the basket of currencies which the SDR represents. But in order to get the yuan accepted by the IMF, China had to comply to certain requirements. One of them was to unveil statistics on their gold reserves and the other one was to adopt the accounting rules by the IMF, better known as the Special Data Dissemination Standards (SDDS).
What are those Special Data Dissemination Standards?
The SDDS is a set of accounting rules introduced by the IMF back in 1996 to get more transparency and consistency in the reporting of reserve assets by central banks. Countries which comply to these rules (73 in total, including many Western countries and most of the BRICS) have to periodically report to the IMF the size of their reserves. China does not comply to these rules yet, but plans to do so in the future. Chinese prime minister Xi Jinping showed his intention to adopt those standards during the G20 summit in Brisbane back in November 2014.
Accepting the IMF accounting rules and opening up the Chinese financial markets should contribute to a broader acceptance of the yuan as an alternative worldwide trading currency to the US dollar. At the moment the US dollar still dominates in international trade settlements, but each year it is losing some of it's market share to the Chinese yuan. Especially in Russia and Africa the yuan is gaining ground as alternative currency for international trade.
From gold weight to gold value
Each month the Chinese central bank gave an update on the size of it's gold reserves (in troy ounces) and it's foreign exchange reserves (in dollars) on the SAFE website. It looked like this...
China added 19 tonnes of gold in July
We write in past tence, because we couldn't find this table anymore on the SAFE website. The link to this file gives a blank page instead of the table shown above. The old accounting table has been replaced with a new one, which does comply to the IMF reporting standards...
China no longer mentions weight, but market value of it's gold reserves on the balance sheet (h/t: @koosjansen)
When we put these two tables side by side, we notice something interesting.. While China expanded it's gold reserves by 19 tonnes in July, the total value of the gold hoard dropped by about $3 billion... FOFOA did some calculations and came to the conclusion that China started marking it's gold reserves to market value. While the gold reserves were valued at $1.170,24 per troy ounce in June, they were valued at only $1.098,42 in July. These quotes are reasonably close to the goldprice fixing of both the last day and the last Friday of each month...
Chinese gold reserves are valued at the London gold fixing
Marked to market (MTM)
This is quite strong evidence that China started valuing it's gold reserves at market value. But why is that so interesting?
It is the recognition by the People's Bank of China that gold should be valued as a fully tradable reserve asset on the balance sheet, equal to the foreign exchange reserves. By adopting a mark to market gold policy, the Chinese central bank recognizes that gold should be valued by the free market and not by political force of governments trying to fix the price of gold to their currency (like in a gold standard).
A central bank valuing it's gold to market value is a central bank recognizing the fact that currency cannot stand on equal footing to physical gold. A lesson from the history of mankind is that gold retains value over time, while currency loses value due to its expanding money supply. When you accept this fact, you realize that any attempt to fix the value of gold to currency is destined to fail sooner or later because the currency gets overvalued compared to the gold.
Valuing gold reserves to market value is consistent with the first rule on the Central Bank Gold Agreement (CBGA), an agreement signed by 15 central banks back in 1999 (and renewed in 2004, 2009 and 2014).
1. Gold will remain an important element of global monetary reserves.
Eurosystem
Coincidence or not, 1999 was the year of the introduction of the euro. Twelve European countries introduced a common currency, the first currency ever to be separated from both the nation state and gold. The birth of the euro was the result of lessons Europe has learned from two devastating World Wars and the failure of a monetary system based on the dollar as the new monetary anchor after the second World War.
The member states of the euro sacrificed their sovereignty regarding monetary policy when they adopted the euro. The purpose of this was to protect the people against a new currency war between European countries. Competitive devaluations and exchange rate manipulation were thrown out of the 'toolbox' of national central banks.
Member states of the euro zone decided to put their gold reserves on the Eurosystem balance sheet, not with the purpose of backing their the currency with gold, but in order to build a solid foundation of trust for the rest of the world.
The success of the euro can be measured by the number of countries using the currency. Twelve countries started the euro project, now there are nineteen members! Despite all the negative articles in the media, seven countries made the decision to drop their own currency in exchange for the euro.
The ECB was the first central bank to value it's gold reserves at market value, instead of a fixed value or weight denomination. Several countries have adopted this gold policy of marking gold reserves to market value. In 2006, Russia adopted a new strategy of buying gold and putting it on the balance sheet at the market value. This year China apparently adopted a similar policy regarding gold. By valuing gold reserves at market value, these central banks join the gradual shift from the current (dollar based) international monetary system to a new (gold based) monetary system. This is a slow transition, which looks like this...
From currency reserves to gold reserves
Russia adopted the same policy in 2006 and increased it's gold reserves
Pro Gold Bloc
Europe, Russia and China have aligned their gold policy. Each of these countries recognizes gold as an important element of global reserves, valuing the metal at the free market price. The Eurasian Economic Bloc also appears to be aligned regarding the function of their gold reserves. This is what Dmitry Tulin from the Central Bank of Russia told Reuters back in May:
"As you know we are increasing our gold holdings, although this comes with market risks. The price of gold swings, but on the other hand it is a 100 percent guarantee from legal and political risks."
Elvira Nabiullina, governor of the Central Bank of Russia, wants to increase gold holdings even further:
"Recent experiences forced us to reconsider some of our ideas about sufficient and comfortable levels of gold reserves."
For China, it is the much of same story. In a recent press release on the State Administration of Foreign Exchange (SAFE) website they give a clear explanation about why China has been buying gold:
"Gold reserve has been a key part of countries' diversified international reserves and many central banks have gold as part of their international reserves. So does China. As a special asset with properties of financial assets and commodities, gold, together with other assets, is conducive to adjusting and optimizing the overall risk and return characteristics of the portfolios of international reserves.From the long-term and strategic perspectives, we will dynamically adjust the configuration of the portfolios of international reserves when necessary, to ensure the security, liquidity, value preservation and appreciation of international reserve assets."
Conclusion
The fact that China started valuing gold reserves at market price is a significant step in demonetizing gold. A gold policy initiated by Europe has been adopted by both Russia and China, two rising economic superpowers on the Eurasian continent. They also recognize that gold should be valued by the free market and not at a price determined by the government.
The United States on the other hand still values it's gold reserve at the historic rate of $42,22 per troy ounce. By valuing the precious metal at a ridiculously low price they neglect gold as an important element of global monetary reserves which can be used to settle international trade. This is not a surprise of course, because it is in the interest of the United States that the rest of the world keeps using (and saving) dollars instead of gold.
But it is just a matter of time before countries drop the dollar and switch to a reserve that does not bear the mark of a specific country. Marking gold reserves to market value is an important step in the expected transition to a new monetary system. This transition has been on the radar of the smartest minds for decades...
Recommended article:
Footnote: This article is based in part on FOFOA's analysis, published on his subscription only blog www.freegoldspeakeasy.com. If you like these kind of articles, please subscribe to his blog ($110 for 6-month membership). Koos Jansen from Bullionstar discovered that China started marking gold reserves at market value, read his thoughts on this topic in his latest blogpost.
According to Yahoo Finance, Russia is selling it’s gold reserves to dampen the decline of the ruble. In this article, we read that Russia’s total reserves declined by $4.3 billion in just one week, which is being explained as evidence that Russia is selling some of it’s gold. The source of the Yahoo Finance article is a Russian website that suggests gold has been sold by the central bank of Russia, but the numbers they give simply don’t add up…
In the week of 28 November till 5 December, the total reserves of the Bank of Russia dropped from $420.5 billion to $416.2 billion. But just one paragraph later, this figure is explained as being the gold reserves of the country, instead of total reserves (gold + currency). Using simple math, we can clearly see that there is something wrong here.
According to the latest data, Russia owns about 1,168 tonnes of gold, which means 1,168,000 kilograms of solid gold bars. Using the current goldprice of $39,400 per kilo, we get a total value of $45.95 billion for all the gold Russia has in it’s vaults. The number of $420.5 billion mentioned earlier has to be the total reserves of the Russian central bank, of which about 10% is held as physical gold reserve.
Yahoo Finance could easily intercept the mistake, simply by doing their own calculations. Now, the reader of the Yahoo Finance article might think Russia sold $4.3 billion worth of gold in just one week, which amounts to more than 100 tonnes of gold at the gold price of today!
Now we can ask ourselves whether the wrong interpretation is the result of ignorance or whether it was done on purpose. The first thing can hardly be the case, because Russia has steadily been buying gold since 2006. Actually, the central bank has increased it’s gold purchases this year. In October they bought about 20 tonnes of gold and in November they added another 19 tonnes to their reserves. It is hard to believe Yahoo Finance was not aware of these facts when writing this misleading article.
Russia has been buying gold for a while
The wrong assumption of Yahoo Finance that Russia has been selling gold lately to support the ruble is contradictory to what is actually happening. The decline of the ruble started months ago, but this has not disrupted gold purchases by the Russian central bank. Actually, Russia has been by far the biggest buyer of gold among all central banks worldwide. The chart below explains it all...
Russia has been by far the biggest buyer of gold among all central banks worldwide in 2014
Foreign exchange policy
The Russian central bank has already explained it has no intention to support the ruble exchange rate on a structural basis. On the contrary, Russia wants to let the ruble float free against other currencies. This means less and less intervention in the forex market by the Bank of Russia. These statistics sent to us by a member of the 'Goudstudieforum' show that the Bank of Russia has indeed no intention of artificially supporting the value of the ruble. In the last couple of months, the Russian central bank has barely sold any dollars of euro's. When we put this data in a graph, we can clearly see how Russia stopped actively supporting the ruble by selling foreign currency reserves. From time to time the Bank of Russia has sold some dollars to scare speculators away from shorting the ruble.
Russian central bank wants a clean float of the ruble (Source: CBR)
Think twice
The message of this article is to show the reader the importance of checking facts and sources of both the mainstream and the alternative media. Please do this as well for the articles we publish on Marketupdate. A wrong translation of false interpretation of facts and figures can lead to conclusions that are the complete opposite of what is actually happening. Always consult different sources to check news facts and events to place them in the proper perspective.
Update (14 december 2014):
Yahoo Finance fortunately spotted the mistake in the article after publication:
"Editor's Note: Earlier it was reported that the Central Bank's gold reserves decreased by $4.3 billion, quoting Vesti Finance. However, in actuality, it is international reserves assets that have decreased — not gold. Appropriate changes have been made."
Russia bought 28 tonnes of gold in April, according to the latest data released by the Bank of Russia. With the purchase, valued at a market price of $1,17 billion, Russia expands it’s gold holdings to a total of 1.070 tonnes. This purchase was the largest since may 2010, when the Bank of Russia added 34,22 tonnes to their gold holdings. The country has been buying substantially since 2006, when it had only about 250 tonnes in their vaults. With the present gold hoard at 1.070 tonnes, Russia ranks sixth among the largest gold holdings in the world.
Since 2006, Russia values it’s gold reserves at the current market price, instead of a fixed historical price. This valuation method is derived from the Eurosystem, which values the European gold reserves at market prices each quarter since the inception of the euro currency. The central bank of Russia valued their gold at $44,3 billion on the 1st of May, which is about 9,4% of their total reserves of $471,1 billion. One year ago, Russia held a larger percentage of their reserves in precious metals, but because of the falling gold price, the percentage dropped as well. By adding yellow metal to the reserves, Russia is approaching the 10% target once again.
Shift from dollars to gold
According to central bank governor Sergey Shvetsov, Russia will keep adding gold to their reserves as a way to diversify from currency reserves. "Last year we bought approximately 100 tonnes of gold. This year it will be less, but it is still a substantial amount." At the same time Russia is selling dollar reserves. According to the latest TIC-data of the Federal Reserve, Russia has sold almost $26 billion of dollar reserves in March alone. Compared to one year ago Russia sold $50 billion of their total dollar holdings. This is a reduction of about 33% in one year.
Russia bought 28 tonnes of gold in April (Source: Goldchartsrus.com)
Earlier this month we published a graph about the US Treasury purchases by foreign countries. From these numbers we concluded China and Japan were the main buyers of this dollar denominated debt, together with the United Kingdom and the Caribbean banking sector. The oil-exporting countries, Russia, Hong Kong, Thailand and some other countries decided to reduce their US Treasury holdings in 2013. It should be clear by now that most countries are not so keen on adding more dollars to their total reserves (with the expection from some countries like Venezuela and Iran). Instead, more countries want to diversify their foreign currency holdings with a tangible asset like gold. Mortymer sent me a tweet earlier this week with the suggestion to put dollar and gold purchases together in one graph…
@frankknopers Could you please make a paper where you put both in the same pic? Buy/sell treasuries/gold. Would be nice! Thanks.
We already had the data to put such a graph together. We started with the TIC-data, published monthly with some delay by the Federal Reserve. We took the time period between January 2002 and September 2013. From these two months we collected data about the gold reserves, mostly from the World Gold Council website. They publish a monthly statement with the official gold holdings. Some missing numbers could be retrieved from the IMF website.
Unfortunately the data is not 100% complete, because we couldn’t find reliable information on the Iranian gold reserve and the gold held by the Caribbean banking sector. There are some numbers about the Iranian gold reserve, varying from 320 to 500 tonnes, but these are not official numbers. This is the same problem we have with the Chinese gold holdings. We expect them to be much larger than the 1054 tonnes published in 2009. The figure could be multiple thousands right now, but we simply don’t have data to prove it.
Gold reserves versus dollar reserves
Despite the shortcomings mentioned above we still get an interesting result if we put all the information together in one graph. The blue bars show the change in US Treasury holdings between January 2002 and September 2013 (in billion dollars), while the yellow bars represent the purchase or sale of official gold holdings (in metric tonnes). Click on the graph to see the full size version.
Change in dollar and gold holdings since 2002
Central banks act in their own way
We can’t draw a clear conclusion based on the graph above, given there is no correlation between the amount of dollars and gold added by central banks during this period. Countries like Russia, Turkey, Mexico, India, Korea, and Thailand bought way more gold than dollars.
The oil-exporting countries (Venezuela, Ecuador, Bahrain, Iran, Iran, Kuwait, Oman, Qatar, Saudi-Arabia, the U.A.E., Algeria, Gabon, Libya en Nigeria) have added both gold and dollars in a balanced matter. China is probably working hard to put more gold against the pile of dollar reserves, but we have no official data to rely on.
A special case is Japan, which has been supporting the dollar by buying billions of US Treasuries and not adding a single ounce of gold to their reserves. The central banks from Switzerland, France, the Netherlands and Spain did’nt buy a whole lot of US debt, but they were liquidating a substantial amount of goud reserves between January 2002 and September 2013!
The Belgian site Moneytalk published a tendentious and misleading article about gold sales by central banks. In the article “Central Banks of Russia and Mexico are reducing gold holdings” they state that central banks lost their confidence in the yellow metal. They refer to the latest IMF figures, which show a sale of the public gold holdings in Russia, Mexico and Canada. Russia sold gold for the first time in more than one year. Combined with sales from the Mexican and Canadian central bank, the author states that central banks have lost their appetite for gold.
Moneytalk is quoting analyst Peter Richardson from JP Morgan. He states that central banks went through “a lot of turmoil” in the past months and tells Moneytalk that central banks could have lost faith in the precious metal.
Misleading information regarding gold
The article on Moneytalk excels in vagueness and brings the reader to erroneous conclusions regarding gold. We can say that, because we use the relevant statistics from the IMF. These figures indeed show that Russia, Mexico and Canada have sold some of their reserves…
The reserves of Russia shrank from 1049,69 tonnes to 1049,304 tonnes, a decline of 0,037%.
The Mexican reserves went down from 127,799 to 127,671 tonnes, a decrease of 0,1% in total holdings.
The Canadian pile of yellow metal shrank from 321,51 to 315,07 kilograms, a 2% drop.
In total, these three central banks sold just over half a tonne of gold in September of 2013. We cannot consider this a substantial reduction in gold holdings, let alone drawing conclusions about central banks appetite for gold as a hedge against currency risk. To put the sale of gold into perspective, we made a chart for the audience. The black slice represents all the metal sold in September by the Russian central bank. In red, you see their total gold stock in tonnes.
