Russia's Gold Buying

Gold buying by the Russian government just hit 135 tonnes for the last year...

SINCE 2009 central banks – as a group – have become net buyers of gold. More importantly they have stopped selling gold, writes Julian Phillips at GoldForecaster.com.

We do not deem the International Monetary Fund (IMF) sales as central bank selling, even if it comes within the totals given under the 1999 Washington agreement – since renewed twice – that puts an agreed 400-tonne ceiling on European central-bank gold sales each year. The distinction is that the IMF sales are to raise funds for a specific purpose, whereas the central bank sellers wanted to diversify their foreign exchange reserves out of gold.

In addition, the central-bank sales formalized by the Central Bank Gold Agreement of 1999, 2004 and 2009 were made in support of the establishment of the Euro currency internationally. Financing the IMF's balance-sheet is a different matter entirely.

It is a matter of record that both China and Russia are now large official-sector buyers of gold. We are of the belief that China is buying all its local Gold Mining production, and using agencies to buy more on the open market for six or more years now.

For almost the same length of time, Russia has been saying they were going to be buyers. Their stated aim is to have 10% of their reserves in gold. With the slow buying of gold until last year they must have thought the Gold Price would rise to make their gold reserves equal that. But in the last year they have put their money where their mouth is, and are buying on the open market too.

Last month's purchase of 15.5 tonnes takes Russia's total gold buying over the last year up to 135 tonnes. How are they buying?

It is evident that the policies of both Moscow and Beijing's central banks are similar. Both are Buying Gold as it is available. This can be done by placing an order at maximum price of say $1170 and asking for offers. They don't move the price unless they are convinced they will attract buyers and feel that the price won't drop in the short-term. If the price falls it is because there is an amount for sale that is yet to be bought. As it falls past the limit given by the central bank, the dealer offers it to the bank, which has the capacity to buy very large amounts easily and quickly.

Dependent on the volume on offer, the central bank buys, but only at their offer price or below. This leads to a central bank such as Russia's buying 3.5 tonnes one month and 15.5 tonnes the next month. The important factor is that they are persistent buyers at a particular price...taking all they can get at that level or below.

If this behavior continues, it underpins the Gold Price. Other parts of the market will have to pay up, or stay away. This leads us to believe that shortly the Gold Price will move up, as such a policy does create a shortage in other parts of the gold market, which has to be met.

With central banks now buyers, the significance of gold as a reserve asset has been heightened, considerably. Other investment buyers see this they realize that it is dramatic support for the Gold Price, far outweighing smaller factors in the market place.

Additionally such demand is long-term investment demand, which will underpin the market for as long as sovereign debt issues undermine the current monetary system. The shift in the economic balance of power will contribute far more than these worries to the monetary system and further enhance the investment attractions of gold.

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