The Russian state is looking to sell gold, and buy it, both at the same time...
RUSSIA'S CENTRAL BANK has bought 180 tonnes since June 2006, and another Russian agency just said it will hold off selling 50 tonnes this year, notes Julian Phillips at GoldForecaster.com.
What's going on?
It takes a long time to buy useful quantities of gold in the open market. Russia took over three years to buy 180 tonnes that way. We imagine that they set price limits when Buying Gold. This meant they bought more in one month than in the next, as gold came onto the market. There is no reason to believe that this policy has changed.
Then suddenly, out of the blue, came a leak that the Gokhran precious metals depository – a state-owned agency – was planning to sell up to 51.44 tonnes by the end of 2009. The leak itself prompted a postponement until next year, but now finance minister Alexei Kudrin says that Russia is considering selling gold on world markets to cash in on high Gold Prices, while the Kremlin faces its first budget deficit in a decade.
Sounds like someone is opening their mouth to change feet? We have no doubt that the Gokhran precious metals depository did not consult the Russian central bank. Indeed, when the leak happened and the world reacted, the news fed through to the Ministry of Finance, who had to say something – and seemed to say the first thing that came to mind.
But this is not a new scene in the gold market. In three gold-holding countries, politicians have tried to rule their central bankers and press for national gold to be sold. One governor of the Banque de France, Christian Noyer, likened it to "selling the family jewels". When the German government felt that gold in the Bundesbank should be sold, there was a public debate that cost the job of the Bundesbank president. He was replaced by Axel Weber, the present incumbent, who also did not want the gold to be sold.
The independence of the central bank was established and the Bundesbank was allowed to hold onto Germany's gold. They retained the option to sell 600 tonnes under the second Central Bank Gold Agreement (2004-2009), which was not taken up. Weber pointed out why (and this is now the official position of the European Central Bank overall) when he said that "Gold is a useful counter to the swings in the Dollar".
Oh, how right that has been! But now this attitude extends beyond the Dollar, as we have seen in the last week. Gold has risen by 5% and more against all major currencies.
France faced the same dilemma, when Noyer – governor of the Banque de France – was pressed by the then finance minister (and now president) Nicholas Sarkozy. Noyer bowed under the future president's pressure and sold most of the 600 tonnes allocated for sale by France under the second Central Bank Gold Agreement. But even President Sarkozy must be regretting the loss to France now.
Then the Italian parliament turned on the Banca d'Italia, expressing a clear desire to see the central bank sell some of its gold to help with Italy's budget deficit. This was blocked by the European Central Bank, who said that it went against the European Union's rules (central banks cannot directly finance government spending), so that potential sale came to naught.
Politicians and central bankers just aren't on the same page, in short. Please note that in two of the three scenes detailed above, central bankers held onto the family jewels. And in the light of the past five years' rising Gold Price, we are sure that France would rather have held onto more of its gold, too. Russia, so famous for its dominant bureaucracy, simply seems to be following a well-blazed trail. You would have though that one phone call from the central bank to the precious metals depository would have solved the problem, and kept them from looking bad in the public's eye.
The Gokhran sale could bring in around $1.7 billion (some 49.385 bn Roubles), but as with the West European sales, this money would barely dent the state deficit. Russia's budget deficit next year is expected to be $99.828bn (2.9 trillion Roubles), and Russia is running a budget deficit of 7.7% of gross domestic product, its first such deficit in a decade. It expects to run a 6.8% deficit next year.
Russia's gold and foreign currency reserves, the world's third-largest, stood at $423.4 billion as of Oct. 16, according to the central bank. The gold reserves have risen 14% by volume this year, to 611 tonnes worth nearly $19 billion (551.67bn Roubles). As the oil income to Russia revives in line with energy prices, so the government finances are likely to improve, diminishing if not eliminating the deficit in time. So there really is no need to sell the family jewels.
Having looked somewhat foolish in the world's press, finance minister Kudrin said "We will continue to study this issue and the decision may come in the next few days." Now we hear that the amount to be sold by Gokhran has dropped to 25 tonnes, at least according to some finance ministry officials. Yet the plot thickened again as the head of the ministry's Administrative Department said, "Maybe we will not sell abroad, but how can we refrain from selling altogether, when there is a presidential decree [to see 10% of foreign reserves held as gold] and a sales plan approved by the government?"
This only seems set to muddy the waters even more, for it still does not address the issue of the central bank diversifying its Dollar reserves into gold to the extent it has.
Back in September, the Russian central bank bought its largest monthly tonnage of gold in the open market, 18.3 tonnes. To say the least, the two policies would appear complementary – if the Bank of Russia takes up the Gokhran sales – allowing the depository to sell its gold in one shot without any foreign exchange transaction, while allowing the central bank to benefit by buying locally, rather than carefully (and at risk of moving the international price) in the open market.
Dare we forecast that common sense will prevail? After all, it would need a very strong bureaucrat to take on prime minister Putin, who – when president – set that 10% target for gold as a proportion of Russia's swollen forex reserves. At present they are nowhere near that level.
It may also be possible that, following India's 200-tonne purchase of IMF Gold, not only China but Russia too is also currently in talks to buy metal from the International Monetary Fund. Slated to sell a total of 403.3 tonnes, we think the IMF should be expected to make its next announcement shortly.
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