Dear PGM Capital Blog readers,
On Monday, April 20, the Central Bank of the Russian Federation (CBR) published its official reserve assets report that indicated, that the country has added 30.5 tonnes of gold (981,500 troy ounces) to its reserves in March 2015. The massive purchase is the largest since September last year and is valued at approximately US$1.15 billion.
According to data from the World Gold Council (WGC), Russia sold less than half a tonne of gold in January. This, however, is peanuts compared to the 30 tonnes it purchased two months later or to the metal it had snapped up in the preceding months. Moreover, this sale seems to follow the pattern we observed in January 2014 when the country sold roughly the same amount of gold as can be seen from below chart.
As a consequence of this on April 1st, the country’s gold reserve stands at about 1,238 tonnes or 39.8 million ounces as can be seen from below chart.
Above chart shows a clear pattern of purchase of Gold by the Russian Central Bank which has boosted the country’s gold holdings from just above 400 tonnes to well over 1,200 tonnes since 2001. Above chart shows also that roughly 173 tonnes of Gold were purchased last year alone, which is more than double the 77.4 tonnes of gold bought in 2013 and above the amounts acquired in any of the previous years.
PGM CAPITAL COMMENTS:
We are not surprised of the Russian government’s decision to continue to accumulate gold, as their consistent accumulation since 2008 suggests something more than simple “reserve diversification”.
In our opinion, Russia strategically is accumulating Gold, to both hedge against financial calamity and to push the world away from the U.S. dollar.
Below chart shows, the decline of the US-Treasuries holding by Russia, since January 2014, and demonstrates unambiguously that country began its de-dollarization efforts before it was hit with Western sanctions.
The message the Russian government is sending is clear, by offloading treasuries and loading up on gold, Russia is making an all-in bet against the US dollar, in favor of the yellow metal.
The continuation of Russian gold accumulation is a sign that the country is still not satisfied with the current shape of financial markets, and that their desire to replace the reserve currency role of the U.S. dollar is not over.
Concurrently, it’s playing an active role, along with the likes of China, Iran, and Kazakhstan, in the expanding international movement to bypass the dollar’s use in trade settlement via the employment of currency swaps and other measures.
The news of the latest Russian gold reserve addition confirms the World Gold Council prediction that overall central bank gold reserve rises will continue at a strong rate this year, beside this, there is also speculation that China may also confirm a big rise in its reserve by as much as 2,500 tonnes or more in the months ahead as it jockeys to try and have the Yuan accepted by the IMF as a part of the make-up of a revised Special Drawing Rights basket.
The IMF-SDR, with currency code “XDR” currently consists of a basket of the US$, Euro, GBP and JPY, with the following weight factors, since January 1st 2006.
The weights assigned to each currency in the XDR basket are adjusted to take into account their current prominence in terms of international trade and national foreign exchange reserves.
Below video, provides more details on the IMF SDR.
The IMF review this basket every five years, for which December 30, 2005, was the last time it was updated.
Earlier this year, Ms. Christine Lagarde, the Managing Director of the International Monetary Fund (IMF) said:
“It was a question of when, not if, China’s Yuan will be included in the SDR basket“
The first step in the IMF’s review of the basket for the SDR, an international reserve asset, is an informal board meeting in May, followed by a formal review in the autumn. Any changes would likely come into effect in January 2016, and can be passed by a simple majority.
In order for the China’s Yuan to be included in the SDR basket, it must be a free floating currency.
Currently the Chinese Yuan is pegged to the US$, analysts believe that a depegged, Chinese Yuan, will appreciate immediately in value against the US$ and other currencies in the SDR Basket.
The IMF will decide on China’s internationalization in December. It is a date to watch. It will be a hint as to how China-U.S. relations will be for the next five years.
The IMF makes such decisions only twice a decade.
The time for China is now!
If the IMF decides to add the yuan into the basket, the path to its internationalization will be well paved, with the consequence that the US-Dollar will have a true rival.
Until next week
Yours sincerely,
Eric Panneflek