Gold Rush Vol. 2: Why is Russia Buying More Gold?

Gold Rush Vol. 2: Why is Russia Buying More Gold?

In January, Russia’s Central Bank (CBR) increased its holding of gold by almost 20 metric tons to 1,857 tons, hitting a historic high.

 As well as outstripping China in gold reserves. But why does Russia need so much gold and how does it help the government to level currency risks?

World Standards

Russia’s international reserves amount to $454 billion, gradually approaching the target level of $500 billion set by the CBR. While the US claims to be the largest holder of gold, with its 8,134 tons, Germany comes in second with over 3,000 tons, while Italy’s and France’s holdings are 2,500 tons.

About 30 percent of the international reserves of developed countries are stored in gold. From his viewpoint, there is no alternative to gold in the financial system, and its accumulation allows one to protect oneself from currency risks, sanctions, as well as gives a chance to raise some money.

Decline in Dependency

While remaining a means of payment in the global trade system, gold contributes to a decline in dependence on any currency.

“First of all, gold is diversification of risks. Of course, it’s less liquid than American or German bonds; the price of this asset can both increase and decrease. But in the event of a collapse of the dollar, gold will definitely preserve its value,” explained Alexander Razuvaev, head of the analytical department at Alpari.

Insurance Mechanism

In the 1920s, the USSR could only trade with other countries by paying with gold. Some may wonder whether such developments could be expected now; experts say that if the Society for Worldwide Interbank Financial Telecommunication (SWIFT) is shut down in Russia, it would amount to a shift to gold payments.

READ MORE: Almost 130 Countries Long for Venezuela's Oil-Backed Cryptocurrency

Iran has showcased that gold is a great insurance against sanctions. When stringent limitations were imposed on Tehran, the country kept selling oil, with transactions made in gold as well.

“In this case gold is a great alternative. This is a market with an annual circulation of over $8 trillion, and you can sell it anytime you want, as you control this asset…” noted financial analyst Alexei Vyazovsky.

Excess Issue

Many analysts have highlighted that since 2008, large central banks in various countries – from the United States to China – have excessively issued banknotes, which has raised concerns over the “quality” of the money.

“The current cryptocurrency craze is a consequence of those concerns. Ordinary people purchase gold and digital currencies, while rational central banks both in Russia and China have been accumulating reserves,” emphasized Constantin Korischenko, head of a chair of stock markets and financial engineering at the Russian Presidential Academy of National Economy and Public Administration.

Gold Becomes More Expensive

Furthermore, the reason for the gold rush is the increase in price. Since January 2017, the value of this precious metal in Russia’s reserves has grown to $76,6 billion from $60,2 billion, marking a 27 percent increase.

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