Why Russia is Investing in Gold More Than Anyone

By: Money_Morning

Jeff Uscher writes: Now we know what Russia has been doing all these years with all its oil mega-profits: investing in gold.

A Bloomberg News article Monday reported that Russia's central bank added 570 metric tons of gold in the past decade, making the country the world's biggest gold buyer. That amount is a quarter more than the world's second-biggest buyer, China.

The amount of gold Russia added to its stockpile is almost triple the weight of the Statue of Liberty, according to Bloomberg.

It certainly makes sense for Russia to add to its official gold reserves. Gold prices have gained about 400% over the past decade.

"The more gold a country has, the more sovereignty it will have if there's a cataclysm with the dollar, the euro, the pound or any other reserve currency," Evgeny Fedorov, a lawmaker for Putin's United Russia party in the lower house of parliament, told Bloomberg in a telephone interview in Moscow.

Does Russia Investing in Gold Mean a Gold-Backed Ruble?
When the former Soviet Union fell in 1991 and was replaced by the Russian Federation, a number of economists - not all of them gold bugs - suggested backing the ruble with gold to provide instant credibility and convertibility in international markets. Following Russia's default on Soviet-era debt in 1998, the idea of making a gold-backed ruble convertible was raised again.

Back in 2011, ITAR-Tass reported that Russian Finance Minister Alexei Kudrin had told a group of finance ministers the increase in Russia's gold reserves "proves that the Russian ruble is strong." Kudrin continued, "Today the Russian ruble can be used in international settlements on the wish of economic entities. Today there are no restrictions for the ruble. The ruble is [a] convertible currency."

Indeed, starting in May 2011, ruble-denominated Eurobonds have been regularly issued by the Russian government and Russian corporations.

On Dec. 13, 2012, an unnamed source at Caterpillar Inc. (NYSE: CAT) said the company, which has extensive operations in Russia, was preparing to issue the first ruble-denominated Eurobond by a non-Russian company later this year.

Although backing by gold is no longer necessary for the ruble to be a convertible currency, the continued acquisition of gold by Russia's central bank has kept the rumor mills humming.

Gold as Alternative to Foreign Exchange Reserves?
In all the excitement generated by the Bloomberg article, it is important to recognize that, even after a decade of aggressive gold purchases, Russia's gold reserves come to only 957.8 tons, putting Russia at number eight in terms of national gold reserves, according to the latest data from the World Gold Council.

What is more interesting is that gold makes up only 9.5% of total reserves. This compares with 75.7% for the United States and 72.8% for Germany.

Given the relentless quantitative easing programs put into place by major central banks, including the U.S. Federal Reserve, the European Central Bank, the Bank of Japan and the Bank of England, it makes sense for Russia to substitute more of its foreign exchange reserves with gold. In this way, Russia will not be exposed to the possibility of having the value of its foreign exchange reserves undermined by expansionary monetary policies by the major central banks.

The spot gold price has failed to react to the Bloomberg story. Spot gold is down $19.00 in midday New York trading on Monday even though the apparent embrace of gold reserves by the Russian authorities is exactly what gold bugs have been anticipating forever.

But this doesn't mean the increase in Russia's gold reserves should be ignored. Having more gold in the coffers of Russia's central bank will certainly take some of the pressure off the ruble, now that it is convertible, when the next financial crisis hits.

Source :http://moneymorning.com/2013/02/12/why-russia-is-investing-in-gold-more-than-anyone/

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