Re. Russia’s gold purchases

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Why are Russia and China buying so much gold? I wasn’t going to talk about this, since the explanation is boring, but Peter Schiff is using it to sell his snake oil. He has ads everywhere on the Internet. Have you noticed that? You’ll be watching some documentary on YouTube, and suddenly he pops up.

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Anyway, if you knew nothing about economics, then you might be intrigued by Russia’s gold purchases. Do the Russians know something you don’t?

The Russian language blog Vedomosti (ведомости, which means “The Journal”) says that, according to the IMF and the World Gold Council in London, the Bank of Russia has become the biggest buyer of gold among the world’s central banks. Vedomosti says that in January 2016 the Russian Central Bank bought 22 tons of gold for around $800 million at current exchange rates. In February 2016 Russia’s central bank bought another 356,000 ounces of gold, and also increased its foreign reserves by another $5.8 billion to $387 billion. (“Foreign reserves” include gold, securities, foreign cash, IMF special drawing rights, and other assets.) That is $19 billion more than what the Bank of Russia had at the end of 2015. Russia now has 1,437 tons of gold in reserve, the sixth largest of any nation

This is delighting the gold hucksters like Peter Schiff. “See??!! Russia knows that the dollar is about to collapse! Protect yourself! Buy shares in my gold exchange!”

SCHIFF'S snake oil

But like I said, the actual truth is mundane. Russia’s gold purchases are simply a response to attacks by the Western Empire (meaning the USA, Canada, Australia, Japan, Switzerland, the European Union, and several other nations.)

Beginning on 17 March 2014 the Empire imposed numerous sanctions on Russia as punishment for supporting the separatists in Ukraine, and later for stopping the Empire’s own terrorist mercenaries in Syria.

Russia responded with counter-sanctions, including a total ban on food imports from the EU, United States, Norway, Canada and Australia.

The sanctions and counter-sanctions, plus the fact that the Russian ruble is not widely accepted outside Russia, make it difficult for Russia to buy imports and sell exports. Plus, the Western Empire can shut out Russia from banking networks like the SWIFT system. Furthermore the price of crude oil started falling in June 2014 and went down to $27.00 per barrel, thereby eliminating three fourths of the foreign currency income that Russia had been getting by selling Russian petroleum.

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In order to buy imports, Russia must not only go around the Western Empire; Russia must also obtain foreign currencies, or else use promissory notes. If a Japanese company wants to sell cars to Russia, the Japanese company will probably want to be paid in Japanese yen, or in U.S. dollars, or in euros, or some other widely used currency. Not in rubles. Russia can, if necessary, tell the Japanese company, “I don’t have enough dollars to pay you right now, but if you will wait a month, I will pay you your price in dollars, plus ten percent in dollars.” The Russian promise can be backed by gold or some other asset, so if Russia reneges on its agreement, the Japanese seller can claim an agreed-to-portion of Russia’s gold (or some other asset).

Because of the Western Empire’s sanctions, some investors sold off their Russian assets. This caused the ruble fell more than 50 percent against the US dollar in 2014. However the Bank of Russia has $400 billion in foreign currency reserves, which the Bank uses to back up the ruble.

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Russia is simply buying gold as a means to offset the Empire’s attacks. This has nothing to do with whether or not the U.S. dollar is about to “collapse.” Canada, which is among the top 10 world producers of gold, has sold off all of its gold reserves except for a symbolic 100 ounces.

To pay for this gold, the Russian central bank has been selling some of its holdings of U.S. Treasury securities, but only the Treasuries with 30-year maturities.

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Trivia: Have you ever been sitting at your computer, and rubbed an itch in your eye, which caused your eye to burn a little? That’s because the oil in human skin (in this case your finger) is corrosive. Hence people use white gloves when they handle gold bars, or antique books, or archaeological items, and so on.

China is buying gold too, because China wants to expand the use of the Chinese yuan as an international currency. On 30 Nov 2015 the IMF allowed the Chinese yuan (a.k.a. renminbi) to be added to the IMF’s Special Drawing Rights (SDR) basket of currencies, which previously included only the dollar, euro, Japanese yen, and the British pound.

This legitimized the Chinese yuan as a global reserve currency, meaning that several different nations can settle their accounts by converting their currencies into Chinese yuan, and by converting Chinese yuan back to their own currencies. At present, the amount of Chinese yuan used for international transactions is still small, but China is working to change that.

Central banks typically hold a blend of currencies as foreign exchange reserves, so that nations can do business with each other, despite having different currencies. Today, the U.S. dollar is the world’s most popular reserve currency, representing roughly 64 percent of global reserve assets. The second most popular currency is the euro at about 20 percent. The British pound represents 5 percent and the Japanese yen 4 percent. That means roughly 93 percent of the world’s foreign exchange reserves are held in one of these four currencies.

But now the Chinese yuan has become a reserve currency. (Or it will when the IMF decision takes effect on 1 Oct 2016.)  Chinese gold purchases are part of a bid to keep expanding the yuan as a reserve currency. The gold encourages foreigners to accept Chinese yuan, because if anything goes wrong in a transaction, the foreigners can lay claim to an agreed-to portion of Chinese gold.

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Zimbabwe uses several currencies, including Chinese yuan. In return for Zimbabwe praising the yuan, China has canceled the equivalent of USD $40 million in debt, and is offering new loans to facilitate a wider circulation of yuan.

Since 2003 the Empire has been using sanctions to attack Zimbabwe for its human rights record its refusal to bow to the IMF. As a result, China has become Zimbabwe’s biggest trading partner, and biggest foreign investor.

So I’m sorry but Russia’s gold purchases don’t mean the dollar is about to “collapse.” Such a collapse could only happen if U.S. society and government collapsed. Suppose you lived in the USA, and the government collapsed, and you had a gold bar. The bar would have no monetary value, since you could not spend it as money. You might try to trade it for stuff, but no one would want something they couldn’t eat, drink, burn, wear as clothing, or sleep under as shelter. The best you could do would be to leave the USA and hope that someone in a foreign land gives you foreign currency for your gold. Then you’d have to stay in that foreign land.

An old saying goes, “Remember the golden rule: he who has the gold makes the rules.”

The truth is the reverse. He who makes the rules gets the gold (and everything else).

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One thought on “Re. Russia’s gold purchases

  1. “Suppose you lived in the USA, and the government collapsed, and you had a gold bar. The bar would have no monetary value, since you could not spend it as money.”

    This point has always made me laugh, if there really were a ‘collapse’, the last thing you would need would be gold!

    Like

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