The Russian central bank has made headlines by purchasing a staggering 1.2 million ounces of gold in September, the country’s largest gold purchase in over 15 years. Analysts are noting that this could have a huge impact on global demand for gold, and that Russia may be attempting to send a message by publicly announcing such a large gold purchase.
As of March 2014, Russia ranks 7th in the world for gold reserves and 4th for gold production. You can see the rest of these rankings in our feature on Gold: How the World Stacks Up.
What could this mean for investors and the gold market as a whole? Below we have outlined articles by Hebba Investments and Bloomberg that address this issue.
Russia’s hefty appetite for gold
The Russian central bank has been consistently increasing its gold reserves since 2007, adding 570 tons in the past decade, so the fact that gold is being purchased by Russia is not surprising. What is drawing attention this time around is the large amount of gold – 1.2 million ounces, or 37 tons, worth around $1.5 billion in U.S. dollars – that was purchased in such a small amount of time.
Here is a chart showing just how much Russia has been stacking up on gold, over less than a decade:
A purchase of 37 tons of gold in one month is equal to almost 1% of the total gold supply, which is not very large to begin with – estimates say that it could all fit into a cube with sides just 20 meters (67 feet) long.
U.S. Dollar vs. Gold – Is Russia trying to send a message?
Hebba Investments believes that Russia’s decision to publicly announce this gold purchase is worth noting. A central bank is generally not required to tell the world about its gold purchases, and many countries such as China choose not to release such information. Therefore, Russia may be attempting to send a message regarding the global status of U.S. currency. As Hebba Investments points out in their article:
“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.”
In other words, Russia may be sending the message that it is turning away from the U.S. dollar, which has been watered down in value after several years of inflation and money printing. The U.S. dollar has been the world’s reserve currency for many years, but this may be changing as more and more central banks are increasing their gold reserves. As Bloomberg puts it, “Central banks around the world have printed money to escape the global financial crisis, sapping investor appetite for dollars and euros and setting off a scramble for safety.”
Conclusions for gold investors
Hypothetically, if Russia were to continue making such large monthly purchases of gold, it would total around 500 tons a year, which equals 12% of total gold demand and is equivalent to all other known central bank gold purchases combined.
Hebba Investments writes:
“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.”
Similar to what we wrote yesterday about the Swiss gold referendum, just one central bank purchasing such huge portions of gold could cause demand to skyrocket, which furthermore could put upward pressure on the gold price. Gold has already jumped by 400% since Russia’s purchases began.
In the bigger picture, this further reflects the growing global appetite for gold, and the increasing preference for physical gold over the U.S. dollar when it comes to storing wealth. Marcus Grubb, head of investment research at the World Gold Council, told Bloomberg “That’s a very significant switch, and obviously a very positive one for the gold market.”
If the central banks of some of the world’s largest and wealthiest nations are turning to gold, then why shouldn’t you? You too can have the safety of storing a portion of your wealth in the form of physical gold, even within your retirement account through a Gold IRA. Call American Bullion today at 1-800-326-9598 for more information.
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