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China & Russia Buying Gold 'as Safe Haven'

Venezuela's central-bank sales also prove value of buying gold before crisis hits...
 
The CENTRAL BANKS of China and Russia are buying gold as a 'safe haven' according to analysts, growing their bullion reserves to defend against the worsening financial and economic outlook.
 
The recent gold sales by Venezuela also demonstrate the metal's value in a crisis, analysts agree, as the former world No.13 central-bank holder raises cash by selling bullion, dropping to No.20.
 
China and Russia's move to buy gold is led by "growing fears over global economic growth and grave concern over the health of emerging market economies," writes analyst Robin Bhar at French investment and bullion market maker Societe Generale, calling it a "key...evident...theme highlight[ing] central banks' view of gold as a safe haven asset." 
 
"[Amongst] emerging market economies," agrees a note from specialist analysts Thomson Reuters GFMS, also pointing to China, Russia and Venezuela, "gold's nature as a safe haven asset is growing in importance."
 
The world's No.1 gold mining producer since 2007, China has seen the People's Bank buy gold at the fastest pace amongst all official holders since 2009. Adding a further 46 tonnes in 2016 to reach 1,808 tonnes by end April, it then paused in May – the first time since at least May 2015.
 
World No.3 miner Russia has meantime bought a further 62 tonnes so far this year, taking its central-bank reserves to 1,476 tonnes of bullion and keeping its No.6 spot amongst national holders, one place behind China.
 
"The slide in crude oil prices," says Bhar, "coupled with the implementation of Western sanctions [over Ukraine and Crimea] has seen the Rouble weaken by almost 50% in two years, forcing the central bank to act...[and] diversify its assets away from the US Dollar and into gold."
 
Moscow's January-April gold buying was only just behind the country's total gold mine output of 67 tonnes over the same period, itself some 7% higher year-on-year according to the Finance Ministry.
 
Beijing's total foreign currency reserves shrank in May near $3 trillion, still the world's largest but down by almost a quarter from the 2015 peak.
 
Like Russia's move to buy gold, China's accumulation "can [also] partially be attributed to China’s desire to diversify assets in light of Yuan depreciation," the SocGen report concludes.
 
In contrast to China and Russia "building up their gold holdings as a form of economic protection," says GFMS, "Venezuela reduced its holdings in order to create liquidity [but] despite the divergence...central banks are being forced into action" in the bullion market.
 
Chart of Venezuela's foreign exchange reserves, 1960-2016
 
Under the popular Socialist government of the late Hugo Chavez, Venezuela in 2011 repatriated most of its 365 tonnes of gold bullion reserves from storage at the Bank of England in London, a move promoted domestically as "historic and symbolic" amid a rising threat of international sanctions over the nationalization of foreign-owned assets, but widely seen outside the country as "expensive and unnecessary" in terms of reserves management.
 
With the economy now shrinking at least 10% per year, collapsing into food riots and looting, data released to the International Monetary Fund show Venezuela cutting its gold holdings by 88 tonnes in 2015 and a further 43 tonnes in the first three months of 2016, raising valuable foreign currency amidst the domestic crisis hitting the government of Chavez's successor, Nicolas Madura.
 
The economic depression, sparked by the long-term slide in the price of oil – a key export – and massive unfunded government spending under chavismo, has now seen an 11% drop in Venezuela's output of the commodity, further denting government revenues and shrinking the central bank's FX reserves by more than 75% from its 2009 peak.
 
Now hyperinflation is following government attempts to keep spending by printing money. The IMF forecasts inflation of nearly 500% this year, and close to 2,000% in 2017.
 
The Venezuelan Observatory of Social Conflict says that over 25% of a total 641 protests held last month were about food. The Venezuelan Observatory of Violence now reports 10 lootings per day, mostly in the capital, Caracas.
 
Data on Venezuela's changing gold holdings would seem to confirm that a 2013 plan to raise a loan of $1.6 billion from US investment bank Goldman Sachs using bullion as collateral came to nothing.
 
If sold at market prices, Venezuela's gold disposals since the start of 2014 have now raised over $5.2bn.
 
By end-May, data from the Banco Central de Venezuela put its foreign currency reserves at just over $12bn, down from $17bn a year ago.

Adrian Ash is director of research at BullionVault, the physical gold and silver market for private investors online. Formerly head of editorial at London's top publisher of private-investment advice, he was City correspondent for The Daily Reckoning from 2003 to 2008, and is now a regular contributor to many leading analysis sites including Forbes and a regular guest on BBC national and international radio and television news. Adrian's views on the gold market have been sought by the Financial Times and Economist magazine in London; CNBC, Bloomberg and TheStreet.com in New York; Germany's Der Stern; Italy's Il Sole 24 Ore, and many other respected finance publications.

See the full archive of Adrian Ash articles on GoldNews.

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