Russia Just Put A Floor Under The Price Of Physical Gold

While American policymakers can barely think one move ahead on the geopolitical chessboard, Russia consistently thinks two and sometimes three moves ahead. A good example is the way that the head of the Central Bank of Russia, Elvira Nabiullina, built up Russian gold reserves for ten years ahead of the War in Ukraine.

It was not the case that war was inevitable. It was the case that war was possible and Russia knew the U.S. would resort to dollar-based financial sanctions. By building up gold reserves in physical form held in Russian custody, Russia partially immunized itself against these sanctions.

By the time the war started in February 2022, gold made up 20% of the entire Russian reserve position (worth about $150 billion at the market price). That gold has given Russia a strong credit standing and solid backing for its currency and helped it survive the U.S. sanctions. Now, Russia is raising the ante with the announcement described in this article.

Russia is doing two things at once. It will now allow the Chinese yuan to make up 60% of total wealth fund reserves (up from the prior ceiling of 30%), and it will allow the share of gold to rise to 40% (up from the prior ceiling of 20%). These rules apply to the Russian sovereign wealth fund but are likely to be extended to the central bank also in the near future.

Of course, the flip side of increasing yuan and gold reserves is to decrease dollar reserves.  This does not mean dumping U.S. Treasury securities. It’s simply the case that Russia can allow the securities to mature, and the Treasury will pay the balance due in dollars; there’s no need to sell anything.

These U.S. dollar reserves (whether held as securities or cash) are frozen by the U.S. anyway, so they’re of no immediate use to Russia. But Russia’s reserves continue to expand based on sales of oil and natural gas. So, converting those hard currency proceeds into yuan and gold will over time reduce the percentage of U.S. dollar assets significantly.

None of this means the end of the dollar as the global reserve currency. That’s a long-term process. But it does increase liquidity in yuan.

Importantly for investors, it creates a de facto floor under the price of gold. Russia will have to buy 100+ metric tonnes of gold per year to achieve and maintain the target ratio of 40% gold. That’s about 2.5% of global output at a time when physical gold is already in short supply.

A price floor is highly desirable from an investor’s perspective. It creates what we call an asymmetric trade where the price can go up and is unlikely to go down much because of Russian opportunistic buying. It’s a good deal for Russia – and a good deal for gold investors as well.

Corporate leaders and institutional fiduciaries looking to incorporate state of the art predictive analytics to their risk mitigation and strategic analysis should click the link to learn more about Raven Predictive Analytics®.