Which 3 Central Banks Bought Gold This Quarter?

November 18 2014

Last week, the World Gold Council (WGC) published the latest quarterly figures concerning the gold market. What caught our attention? Putin is increasing Russian gold reserves; last quarter the Bank of Russia purchased 55 tons of gold (according to my calculations, a 10 percent increase). It thus seems that Russia wants to profit from the recent lows in gold prices.

Which 3 Central Banks Bought Gold This Quarter?

Last week, the World Gold Council (WGC) published the latest quarterly figures concerning the gold market. What caught our attention? Putin is increasing Russian gold reserves; last quarter the Bank of Russia purchased 55 tons of gold (according to my calculations, a 10 percent increase). It thus seems that Russia wants to profit from the recent lows in gold prices.

Why Does Russia Buy That Much Gold?

Of course, it has been long known that Russia is buying gold for geopolitical reasons. Already since the 2008 crisis, the Russians have been buying precious metals in large quantities. So far, no surprise there. However, this time there is another reason why Russia is buying a lot of gold now.

That is, the collapse of the ruble.

Just like earlier this year, the Russian currency faced troubling times. It was an easy target for speculators, since the Russians were trying to maintain the ruble's trading corridor. In fact, they promised to buy dollars when the ruble’s exchange rate was to rise to a certain point and to sell dollars in case the ruble’s exchange rate were to drop below a certain threshold.

In short, in an attempt to stabilize the ruble, the central bank was forced to sell dollars. And what assets did the Russians decide to buy with those dollars?

Indeed, physical gold.

The "Ruble-Dollar"-Peg is History

However, speculators anticipated central bank interventions to an increasing extent, resulting in a cat-and-mouse game (after all, as soon as an exchange rate lower boundary was hit, the entire market knew Russia was going to sell dollars). The ruble fell into a downward spiral.

It has recently let to Russia freely floating the ruble exchange rate. However, Russia can and will, if deemed necessary, at any point in time decide to sell foreign currency to stabilize the ruble. But at least nobody is able to front run central bank purchases.

In short, the worse the exchange rate of the ruble, the more gold the Russian central bank will purchase.

Past year, Russia’s foreign currency reserves have declined by 100 billion. However, 380 billion of reserves still remain. Similar to the central bank of China, its Russian counterparty will not stop buying gold as long as prices are as low as they currently are.

Why China’s Central bank Is Buying Gold as Well

I recently received a comment by a German reader who claimed that China’s central bank had stopped buying gold.

I regard it as highly unlikely that someone can substantiate such claims. Moreover, I think the very opposite is likely to be true.

Of course, China’s central bank is the big unknown factor, that is, data on China’s gold purchases are unknown and kept secret at all cost. The World Gold Council also remains silent with respect to gold purchases by China’s central bank: put simply, no data exist.

However, given the recent drop of the yuan, it can be reasonably expected that China’s central bank is also increasing its gold reserves significantly. Since the yuan is strictly regulated, bear in mind that the yuan is still pegged to the dollar, the Chinese are now forced to exchange part of their dollar reserves. And what would they exchange these dollars for?

Indeed. Just like Russia, China has to support its currency and it will do this by selling dollars and, I assume, by trading these dollars in for gold in one way or another.

Some Remarks on the Oil Price

Nevertheless, the most remarkable development this week was the price of oil. Although GoldRepublic does not offer you the possibility of buying crude oil — as you will understand, investing in physical oil as somewhat problematic considering it literally evaporates over time — the drop in the price of oil has major implications for, amongst others, gold.

Today, the oil price dropped once more to below a price of $75 a barrel (WTI).

Why does the oil price matter?

The price of oil is declining because of a lower demand from Europe, Japan and China. It reflects the global economic weakness. And again, the oil price can still easily drop further by several tens of dollars. It means, and it is correct, that we expect a further weakening of the world economy. And this is good news for the price of gold.

Economic growth in Europe has come to a standstill, that much is clear. The GDP data published today— that in light of their standard deviation, could easily have been negative — also showed that the European economy is not recovering. To illustrate, the Dutch economy grew by a meager 0.2%.

Russia also anticipates lower oil prices. However, Putin thinks Russia has sufficient foreign currency reserve to bear a price decline.

Which Was the Third Central Bank That Bought Gold?

The third central bank to buy gold in significant quantities past quarter, was Kazakhstan’s. The Kazakhs bought 28 tons.

A surprise?

No, given that the underlying reason is similar to Russia’s and China’s.

Kazakhstan is a country rich in natural resources and the export of minerals and metals are its main source of revenues. Kazakhstan’s currency is also pegged to a basket of foreign currencies. Low commodity prices forced the Kazakh central bank to exchange foreign currency. And also the Kazakhs opted for, as you may guess already, gold.

What will you do? Will you follow the example of the Russians, Chinese and Kazakhs?

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