Vlad and Elvira Sell Dollars and Buy Gold, Should You?
Vladimir Putin may or may not have a friend in the US president, but he, or at least his central bank, has broken up with US treasury bonds. In April and May of last year, Russia's central bank liquidated $81 billion in Treasurys, nearly its entire holdings.
Russia fell off the top 30 list of US treasury bond holders. Bank of Russia’s head is the wonderfully named Elvira Nabiullina. She dumped $101 billion in assets last year in its biggest-ever shift away from the U.S. currency amid fears of new sanctions.
“We aren’t ditching the dollar, the dollar is ditching us,” Putin said in November. “The instability of dollar payments is creating a desire for many global economies to find alternative reserve currencies and create settlement systems independent of the dollar.”
So if Russia ditched most all its US assets, what is Putin and Elvira buying? First of all the Bank of Russia has been stocking up on Chinese Yuan. Second, Russia has been buying that 3,000 year old currency--gold.
Russia is not alone in lightening up on dollar exposure. In the 4th quarter of last year, “reserve managers actively decreased their allocation to USD—the share of USD reserves declined despite modest Dollar appreciation—while they actively added to EUR and CNY reserves. According to Goldman calculations, the drop in Q4 USD reserves was equivalent to just over $50 billion in dollar reserves sold,” reports ZeroHedge.com.
The Yuan is an interesting choice as it is not easily converted. However, gold is, as it has been for centuries, highly convertible. ZeroHedge notes the Yuan’s limitations, and points out, “Which is probably why Moscow has relied on another reserve option that's popularity has endured for most of the history of human civilization: Gold.”
A late March Bloomberg headline blared, “Russia is Dumping U.S. Dollar to Hoard Gold.” Bloomberg’s reporting centered on Russia wanting to steer away from dependance on the U.S. dollar and American assets. Russia has quadrupled its gold holdings with the country’s stockpile of the yellow metal up over one million ounces. Analysts are calling these moves dedollarization.
Plenty of gold is mined in Russia, yet the country’s central bank is buying more than the amount mined in the country.
Amoungst all central banks, as of the end of the 4th quarter of 2018, “the amount of USD-denominated exchange reserves ticked down to $6.62 trillion, and the dollar’s share of global foreign exchanges reserves dropped to 61.7%, the lowest since 2013.”
French President Emmanuel Macron said in November that European corporations and entities are too dependent on the U.S. currency. He called it "an issue of sovereignty." Even Poland and Hungary joined Russia by making the first substantial gold purchases by a European Union nation in more than a decade.
Central banks are notoriously bad in timing their gold purchases. The gold price might have collapsed in 2018 if not for central bank buying.
“If it wasn’t for Russia’s central bank, last year would have been the worst year for gold buying in a decade, so it helped put a floor on the price,” Adrian Ash, head of research at gold brokerage BullionVault Ltd. told Bloomberg. “However, Russian buying is now well known so it would take a significant increase in their purchases to materially impact the gold price.”
Kitco’s Neils Christensen explains, “Gold analysts have been watching central-bank gold demand closely as official gold demand is expected to continue to support prices through 2019. According to the World Gold Council, central banks collectively bought 651.5 tonnes of gold in 2018, the most purchases in more than 50 years.”
President Trump tweeted, “Our Economy is setting records on virtually every front - Probably the best our country has ever done. Tremendous value created since the Election. The World is respecting us again! Companies are moving back to the U.S.A."
Foreign central bankers must see something he doesn’t: maybe a trillion dollar annual deficit and $22 trillion national debt.