Streetwise Professor

November 21, 2014

Swatting the Gold Bugs

Filed under: Economics,Military,Politics,Russia — The Professor @ 8:41 pm

There are idiots. There are morons. Then there are gold bugs. It would be a full time job fighting their insanity, and doing so is like kicking a manure pile: it raises a stink and a cloud of flies. But sometimes it just has to be done.

Recently it was reported that Russia has been buying gold at a furious rate. Gold now represents almost 11 percent of the country’s reserves.

The gold bugs buzzed in glee. To them, it represented another nail in the coffin of the doomed dollar, and Putin was an economic genius making a decisive move in his war against the US. And of course, Zero Hedge peddled this line (by posting an article by a bug site):

Russia’s central bank Governor Elvira Nabiullina told the lower house of parliament about the significant Russian gold purchases. She is an economist, head of the Central Bank of Russia and was Vladimir Putin’s economic adviser between May 2012 to June 2013.

This announcement is unusual and to our knowledge has not happened before. The announcement by the Russian central bank governor was likely coordinated with Putin and the Kremlin and designed to signal how Russia views their gold reserves as a potential geopolitical and indeed financial and currency war weapon.

(The comments are priceless.)

Here’s another, from July:

Reserve Currencies In History – Dollar’s Demise Cometh

Central banks continue to be buyers of gold at these attractive price levels. As sanctions, economic war and currency wars intensify we expect Russian and Russian ally buying of gold reserves and selling of dollars to intensify. Aggressive buying of gold and particularly silver by Russia will likely lead to defaults on the COMEX gold and silver futures exchanges and potentially an international monetary crisis.

See important guide to Currency Wars here Currency Wars: Bye, Bye Petrodollar – Buy, Buy Gold

The truth, of course, is much different. This is actually another symptom of Russian economic desperation, rather than a diabolically brilliant blow against the dollar:

Russia’s central bank has been forced to step up its gold buying this year to absorb domestic production that Western sanctions are making it hard for miners to sell abroad, and to boost liquidity in its foreign reserves, sources said.

Most Russian gold mine production is sold to domestic commercial banks, such as Sberbank or VTB, which can then sell the metal on to either the central bank or to foreign banks.

This year, sources say, foreign banks are holding off buying Russian gold after Western powers implemented sanctions against the country over the Ukraine crisis.

The central bank has therefore had no choice but take domestic mine production that cannot be sold to foreign banks, two sources said, and has bought most of the metal that commercial banks had available.

. . . .

While the sanctions do not expressly prohibit them from buying gold, Western banks are cautious over any business done with their Russian counterparts, sources said.

What’s more, the Russian CB can pay for the domestically-produced gold with rubles. It’s the only way it can really bolster reserves without selling rubles for dollars or euros.

Thus, rather than a blow against sanctions, it is yet another action forced on the Russians by them.

It’s also interesting to note that gold hasn’t been a great investment for the Russians. Gold purchase data is available on a quarterly basis. Assuming that Russia purchased gold in a quarter at the average price during those three months, based on IMF data and the current spot price of gold, I estimate that Russia has lost well over $1 billion on the gold purchased since 2009.

Speaking of Russia’s reserves, this piece by Anders Aslund is well worth reading. When he breaks down the numbers, Russia’s vaunted reserves look much less impressive. In particular, Anders points out that the National Wealth Fund and the Reserve Fund are not under control of the Central Bank, and committed to supporting pensions and the federal budget. Moreover, sharks like Sechin are already laying claim to big pieces of it. Further, Russia’s large external corporate debt cannot be refinanced due to sanctions, and payment commitments over the near to medium term will rapidly draw down the remaining reserves, and the current account surplus will fall substantially due to lower oil prices.  

One last gold item. ISIS are gold bugs. They have announced the creation of a currency, based on circulating gold, silver, and copper coins. They really believe the gold bug stuff. They are aficionados of ZH and currency warrior James Rickards (whose mug pops up everywhere, including on mainstream media websites like WaPo, in advertisements for his buy gold, buy a bunker, for the end is nigh book).

I was particularly amused by this:

 The gold and silver purchases are strange enough, he said. “But what is striking is how elements of the organization have seized power transmission cables and other copper components,” Obeidi said. The fighters are burning the insulation off the cables and harvesting the copper [to fashion into coins], he said.

So they’ll have metallic coins but no electricity. Which may be OK with them, given how much they want to live a 7th century lifestyle.

This is great news. If a shambolic Iraqi military can’t destroy the Islamic State, economic mismanagement based on wacko gold bug theories might achieve that result instead. I suggest that the CIA carry out a mission to translate Rickards’ Currency Wars into Arabic, and clandestinely distribute it in ISIS-controlled lands. A very cheap, but very effective, form of subversion.

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  1. On its next leg down, I’m going to start pricing gold in terms of copies of Currency Wars.

    Comment by chris — November 22, 2014 @ 8:41 am

  2. Curious to me that the Streetwiseprofessor feels the need to “swat” here. With currency wars raging, Japan fully monetizing debt, a re-emergent Cold War, financial suppression, China vastly over-extended on credit and the S&P levitating…

    Is a position in a form of money with no counter-party risk really a horrible idea, worthy of contempt and attack? “Evil Russians like gold! evil terrorists like gold! Gold is evil and anyone buying it is a rube.”

    Seems like strafing the lifeboats.

    Comment by Okienomics — November 22, 2014 @ 9:09 am

  3. On a long enough timeline Zero Hedge’s correct predictions may not be zero.

    Comment by pahoben — November 22, 2014 @ 12:29 pm

  4. Aslund’s piece is helpful but is not news. The breakdown of the CBR’s reserves is common knowledge, at least to Russia-focused economists. You don’t even have to have access to Bloomberg to figure it out – the CBR’s and MinFin’s sites should suffice. Even I mentioned the reserve funds in this comment. As for Aslund’s conclusions, I’m afraid the external debt squeeze won’t come as soon as Aslund is predicting even with $80/bbl: imports are collapsing because of the weak ruble so the current account surplus isn’t shrinking fast.

    Note however that Rosneft is not asking for dollars – they are asking for rubles, essentially saying, “We can pay back out dollar debt from our export revenues but you, the government, will lend us rubles so we can finance our domestic capex.” The Russian press says Novatek (where Timchenko owns 24%) is asking for hard currency though.

    Comment by Alex K. — November 22, 2014 @ 12:51 pm

  5. @pahoben. Blind hogs. Acorns.

    The ProfessorComment by The Professor — November 22, 2014 @ 3:16 pm

  6. Even I mentioned the reserve funds in this comment

    I meant to thank you for that response. Allow me to do so now.

    Comment by Tim Newman — November 23, 2014 @ 3:56 am

  7. paper bugs are really getting desperate

    Comment by youdumb — November 24, 2014 @ 10:44 am

  8. Russia and China are already on the side of Gold. If ECB begins to buy gold, then it’s game over for the dollar.

    Comment by youdumb — November 24, 2014 @ 5:11 pm

  9. @youdumb-I have no plans to go long gold, but I might go long tinfoil. There’s obviously a huge demand from people like you.

    The ProfessorComment by The Professor — November 24, 2014 @ 8:02 pm

  10. the problem with paper bugs is no matter what evidence you show them, they will just stick fingers in their ears and go “lalalallalalala”

    Comment by youdumb — November 24, 2014 @ 9:53 pm

  11. @youdumb-If you are capable of arithmetic, perhaps you should compute the fraction of China’s reserves held in gold vs. the proportion in paper dollars. Hell, generous guy that I am, I don’t want you to strain yourself, so here it is for you, on a platter. Looks like the Chinese are the world’s biggest paper bugs.

    The ProfessorComment by The Professor — November 25, 2014 @ 12:35 pm

  12. ISIS is apparently in the same boat as all central banks as gold bullion is the only liquid physical asset all central banks hold.

    By your logic ‘Professor’, that would conflate to central banks being partially in line with a 7th century mindset.

    You (and apparently Barry Ritholtz) likely didn’t get the moral of the Emporer’s New Clothes fable.

    Comment by Anthem — November 25, 2014 @ 6:44 pm

  13. @Anthem. If that was supposed to make sense, you failed.

    And I am a professor. You can look it up. So save pixels and drop the quote marks.

    The ProfessorComment by The Professor — November 26, 2014 @ 9:52 pm

  14. china last reported their gold reserve in 2009, so you are looking at 5 year old information, which i think was not real anyway.

    Comment by youdumb — November 27, 2014 @ 1:35 am

  15. I believe Chinese government finished its gold accumulation in 2011 is the reason why gold price peaked in 2011, china’s holding of US treasury also peaked in 2011, it’s not a coincidence.

    Comment by youdumb — November 27, 2014 @ 1:59 am

  16. […] while the CBR, Russian media and Western gold-bug websites have trumpeted this year’s doubling of Russia’s central-bank gold buying from the pace […]

    Pingback by Russia's Big Lesson for Gold Investors | Network Gold — December 30, 2014 @ 7:15 am

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