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.
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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.
The Austrian central bank has successfully repatriated part of it’s gold reserve from the Bank of England and wants to show this to the rest of the world. So they invited the press to visit the central bank and take a look at the freshly delivered goldbars in the vault. Nikolous Jilch from Die Presse was attending this press event and shared a picture with us on twitter.
Earlier this year, the central bank of Austria announced it’s plans to repatriate 110 tonnes of gold, a significant portion of it’s total hoard weighing about 280 tonnes. According to Ewald Nowotny, governor of the Österreichische Nationalbank, the repatriation of gold is part of the new gold location policy of the central bank. The central bank doesn’t only want to bring back precious metal stored in Londen, it also wants to expand the amount of gold held at the Swiss National Bank.
Until recently most of the Austrian gold was stored abroad, which led to a lot of public debate and a desire to bring back at least some of the bars belonging to the Austrians. The illustration below shows the old and new location policy of the Österreichische Nationalbank.
Location of Austrian gold reserves
Global repatriation of gold
When Venezuela decided to repatriate gold from the Bank of England back in 2011 and 2012, it was met with a lot of suspicion and scepticisme. But now it seems he set a new trend by bringing in gold stored abroad. The past couple of years more countries followed the example set by Venezuela, like Ecuador, Germany and the Netherlands. They have already shipped some yellow metal back to their own central bank vaults.
In Belgium and France there has been public discussion about repatriating gold, while the people in Switzerland started a referendum forcing the central bank to bring back all the gold reserves held abroad.
It is quite remarkable that the Austrian central bank invites the press to take a look at the newly arrived gold bars. What kind of message do they want to sent to the rest of the world?
Update: Austria doesn’t store gold at the Bundesbank, as we mentioned previously on Marketupdate.
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...
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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.