The demand for gold is now lower than ever. However, Russia continues to increase its gold and foreign exchange reserves. For the sake of this strategy, Russia is ready even to accept losses.
Vladimir Putin obviously does not proceed from the scenario in which relations with the West quickly return to normal. This is indicated by figures recently published by the IMF. According to these data, in July, Russia bought 26.1 a ton of gold - this is the maximum since November 2017 of the year. In May, the Central Bank acquired 20 tons, and in June, 17 tons of gold. The amount of gold increased by 37% compared to 2016 year. The value of this gold at the moment is 76 $ billion.
The purchase is particularly interesting in the light of the fact that it coincided with the sale of US debt bonds (treasuries). Now the Central Bank holds only 17% of its assets in US bonds. Moscow fears that in the future because of sanctions it will not be able to sell treasuries, and also that Russian banks will be cut off from dollar transactions.
“Putin has a strategic plan,” believes political consultant and author of books, James Richards. “The Russian president buys gold because the dollar is used as a weapon against the Russian economy.” Gold is considered an optimal investment to protect against dollar sanctions.
The Kremlin has really systematically accumulated gold reserves over the past decade. From 2008, reserves increased by 4 times - from 457 to 1944 tons.
Gold not carries political risks
Russia has recently even surpassed China and now has the world's fifth largest gold and foreign exchange reserves. Despite the fact that this country generates only 2% of world GDP, Russia has 17% of the world's gold reserves.
To implement its strategy, the Russian Federation accepts losses. The price of gold has declined in recent years. In August, the price per ounce fell below 1200 dollars. Only this year, gold lost 9% in value against the dollar.
“Russia must arm itself against sanctions that threaten its national security” - Steve Hank, professor of finance at Johns Hopkins University. Gold is the best way to protect the national currency. "Gold is not emitted by any particular state, therefore, investments in it do not carry political risks."
Hanke appeals to Nobel laureate in economics 1997 of the year, Bob Mundell, who predicted that gold would play a more significant role in the international monetary system 21 century. Donald Trump, who uses the dollar as a weapon against other states, just brings the realization of this forecast closer. In the end, all states that will be isolated from the global financial system as a result of the dictates of the dollar will look for alternatives. Hank believes that Turkey, Iran and Russia will form a kind of “golden block” in order to become independent of the dollar.
On Thursday, the Central Bank of the Russian Federation said that while it stops buying the dollar. This is due to the fact that the ruble has now depreciated to a maximum of two and a half years. In February, the dollar was worth 55 rubles, now already 70.
“In terms of fundamentals, the ruble exchange rate is very low,” said Chris Wofer, an analyst at Macro Advisory Consultancy. This is a consequence of American sanctions. The ruble is one of the largest currency losers of this year. Further purchases of the dollar would put even more pressure on the national currency. However, the dollars acquired by the Central Bank of the Russian Federation need to be invested somewhere. And the desire to invest them in US debt is not great. The Russian Central Bank is restoring its international reserves after the 2014-2015 crisis, when 150 $ billions were burned to stabilize the ruble. At the moment, the international reserves of the Central Bank are 458 $ billion, which is still 66 $ billion less than before the crisis.
Putin repeatedly called sanctions senseless and counterproductive. It's not just words, he step by step implements his plan.