Russia’s Central Bank Stops Buying Gold As The Low Oil Price Bites

Russia’s heavy reliance on oil to balance its budget could lie behind a sudden shift by the country’s central bank from buying locally mined gold to encouraging miners to export what they can.

The surprise move sent a shudder through the gold market, triggering a $40 fall in the price which dived back below $1600 an ounce.

Until earlier today, Russia’s central bank had been soaking up a large portion of the country’s gold production, spending an estimated $40 billion over the last five years to amass a stockpile of 2279.2 ton of the metal, the 6th biggest holding in the world, behind France (2436 tons) and Italy (2451.8 tons) — but well behind the U.S. with its 8133.5 tons.

While most central banks own some gold it has been Russia’s buying which has stood out with the urge to acquire gold seen as a way of cutting the country’s exposure to the U.S. dollar in its official reserves.

But with Russia’s national income badly bruised by the collapse in the oil price, and with the threat of oil falling further without a deal with Saudi Arabia and the U.S. to better manage the oil market a cash flow crisis could worsen, which might be a reason to look for other sources of revenue.

Any movement in gold investment policy by a major central bank is important in the gold market because they are the biggest owners of gold and have the financial muscle to shift the price, whether as buyers or sellers.

Seasoned gold investors are familiar with the effect central banks have on gold with the most dramatic events occurring in the 1990s when it became fashionable for the banks to cut their exposure to the metal despite its status as a currency of last resort.

The shift from being benign holders of gold to active sellers, especially a controversial decision by the Bank of England to sell the lion’s share of its gold, drove the price from around $400/oz at the start of the 90s to $250/oz by the close of that decade.

The central bank selling only started to end in late 1999 with the signing of the Central Bank Gold Agreement, a deal also known as the Washington Agreement, which limited central banks to the collective selling of 400 tons of gold a year, plus a ceiling of 2000 tons over a five year period.

The Washington Agreement was renewed several times but officially came to an end in September last year, 20 years after it was agreed.

Potentially, there is a connection between the end of the Washington Agreement and the decision of Russia’s central bank to stop buying domestically-mined gold but the more likely reason is that the oil crash is hurting the country’s budget.

Rather then persist with a plan to absorb the country’s gold production the new policy is a reversion to a status of using gold to earn dollars — without actually saying that.