The dramatic drop in the price of gold makes Russia look like a classic sucker: As the price went down, it expanded its gold reserves. The Russian central bank is getting punished for betting on gold rather than U.S. assets as the Cold War seemed to restart last year. But it’s not that simple — the gold that Russia’s buying is domestically produced and paid for with devalued rubles.
Russia has the fifth-biggest gold reserves in the world, after the U.S., Germany, Italy and France. It got there by steadily buying gold from domestic producers, and the woeful price trajectory since the September 2011 all-time peak has not stopped that activity, as the graph below shows.
From an investing point of view, this was stubborn insistence on a losing bet. In early September 2011, Russia’s 27.2 million ounces of gold were worth $52.3 billion. At the end of June 2015, the country’s gold reserves almost reached 41 million ounces, but they were worth just $48.1 billion, and that’s down to $44.9 billion now. Not a great way to manage reserves.
One reason Russia’s otherwise highly competent central bankers did this was political. Last year, after the Crimea invasion, the fear of Western financial sanctions made them dump U.S. treasuries, reducing holdings to $86 billion in December from $126.2 billion in February, and seek a safe haven in neutral, albeit unfashionable gold. It bought 171 metric tons, or 5.5 million ounces, in 2014.
That, however, doesn’t explain why Russia was buying so much gold before it became an internationally recognized threat, and why it kept expanding reserves this year, after the fear of stringent sanctions — such as an Iran-style cutoff from the Swift payment system — subsided.
Russia is no longer dumping U.S. securities. According to the U.S. Treasury, after keeping its investment below $70 billion in February, March and April, the Russian central bank increased it to $70.6 billion in May. Yet gold purchases continue. After a hiatus in January and February, the central bank acquired almost 2.2 million ounces over the next four months.