In Russia’s Sovereign Wealth Fund, the Dollar’s Out and Gold Is In

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In Russia's Sovereign Wealth Fund, the Dollar's Out and Gold Is In

The tale of Russian gold purchases has taken yet another interesting turn that might, at first glance, be difficult to decipher. After spearheading central bank gold purchases year after year in an almost boastful fashion, as if to remind Western interests that sanctions imposed on the nation can only accomplish so much, it ceased all purchases last March.

Its central bank gave a vague statement and has made no official purchases since then, only making two small sales. It was quite the shift from purchasing gold bullion in double-digit tonnage every month, but nonetheless left the country with the fifth-largest sovereign gold stockpile in the world, amounting to 2292 tons.

Russia’s National Wealth Fund

When people talk of sovereign gold stockpiles, they almost invariably refer to the amount of gold owned directly by a national central bank. Yet just as Russia so often blurs the line between public and private business, it appears that the same effect is happening with its national fund allocation. The $185 billion National Wealth Fund (NWF) is the latest edition of Russia’s state wealth fund. It has changed names since its introduction in 2004, but its focus was always on having a diverse portfolio that would protect Russia’s state budget against oil price fluctuations and secure the nation’s pension fund.

In December 2019, Russia’s Finance Minister Anton Siluanov made a statement that the fund should invest in gold due to the metal’s reliability. In November, the Russian government came up with a proposition that would allow the NWF to buy and store gold, and on May 21, an official announcement was made that the fund was greenlighted to do just that. The gold, unsurprisingly, will be stored with Russia’s central bank.

Where does the money come from?

The NWF is similar to the sovereign wealth funds owned by many nations who enjoy budget surpluses. Norway, China, and Abu Dhabi currently place in the top 3 for fund balances. The concept is simple: money in a sovereign wealth fund gets invested like a pension or an endowment, with profits accruing to the fund (and, by extension, the nation).

Like Norway’s and Abu Dhabi’s funds, the Russian sovereign wealth fund takes its seed capital from the nation’s oil industry. Any Russian oil revenue that isn’t allocated to the federal budget goes to the NWF, and the NWF spends it on a wide variety of assets.

Perhaps the worthiest of mention here are foreign exchange and foreign debt securities, which will likely lessen in favor of gold and precious metals over the following months and years.

Last year, gold officially become a bigger component of Russian reserve assets than U.S.-dollar denominated assets. It has since continued to de-dollarize amid risks of sanctions from both the U.S. and the European Union.

Gold’s popularity as an asset

Various nations that have purchased gold officially over the past few years cited the metal’s utility as a tool for sovereign influence and a universally-accepted store of value, despite having no immediate threat of sanctions unlike Russia.

In short, the new legislation means Russia can continue hoarding gold and dumping dollars under the guise of sound portfolio management. While the NWF issues supposedly accurate allocation reports, the same can’t be said of the State Fund of Precious Metals and Precious Stones, another government branch that does not publish reports on its gold reserves. As sovereign nations open up about the importance of owning gold to maintain clout on the global stage, Russia now has three different investment vehicles through which it can increase its bullion stockpile and lessen dependence on foreign assets.

The Odd Synchronized Rise of Gold and the USD (Here’s Why)

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A rare set of circumstances has the dollar and price of gold rising together. One analyst has a theory for why it’s happening, and where gold may go from here.

Synchronized Rise of Gold and the USD

As MarketWatch’s Ivan Martchev points out, this year has seen a strange occurrence of gold rising alongside the U.S. dollar. Historically, a strong greenback has acted as one of gold’s biggest headwinds, as the metal is primarily priced in the U.S. currency.

However, this past summer, gold tested one resistance level after another, gaining as much as $300 so far this year. At the same time, the greenback continues to hover around all-time highs. To explain this phenomenon, Martchev explains how it’s important to look at the Broad Trade-Weighted Dollar Index, which takes in many more metrics than the regular DXY index.

Martchev notes that the dollar’s strength is no longer dictated solely by the Federal Reserve’s funds rate. Instead, the monetary policies of various economies across the globe have played a major role in holding the U.S. dollar up while also allowing gold to post its best performance in six years.

Negative-yielding bonds in Europe, a dismal Brexit situation and quantitative easing (QE) from the European Central Bank have all propped the dollar up. Yet these same factors are also highly beneficial for gold. The U.S.-China trade war and Beijing’s consequent devaluation of the yuan is another bullish component for the gold market, as the yuan’s depreciation pushes global central banks towards more quantitative easing. As Martchev notes, these QE programs have helped plunge various bonds into negative territory, leaving investors with less and less safe-haven options.

There is also the matter of excess fiat reserves in the global monetary system. While the ballooning of various central banks’ balance sheets, caused by central bankers purchasing their own bonds, has not yet led to an expansion of the monetary supply, gold enthusiasts remain hopeful that these money printing antics will eventually bring about hyperinflation and push gold to new highs. Although there hasn’t been a spike in inflation so far, the resulting negative-yielding bonds have proved to be enough of a booster for the gold market.

Martchev sees various venues for gold to continue its strong upwards momentum. According to him, a continuation of QE programs by the ECB and the new norm of negative-territory European bonds should lead to an additional 15%-20% gain in gold prices over the next 12 to 18 months, especially if the Federal Reserve shows an eagerness to employ QE of its own. Should a U.S. recession occur in the near-future, as many analysts and even the Fed itself have been forecasting, Martchev thinks gold will move to new all-time highs as Fed officials apply questionable policies to offset the domestic economic contraction.

Our Dollar Crisis Deepens: More Nations Turn Their Back On Our Currency

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AT A DISTURBINGLY INCREASING RATE, THE WORLD IS MOVING AWAY FROM THE U.S. DOLLAR. WHAT DOES IT MEAN FOR OUR CURRENCY’S FUTURE?

trash pile Our Dollar Crisis Deepens: More Nations Turn Their Back on Our Currency

From Filip Karinja

In recent history, for as long as the U.S. dollar has reigned as the global reserve currency, countries have traditionally paid for goods in trade by converting their currency into the dollar. Thus there has usually been a huge (but artificial) demand for the greenback.

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Interest Rates Just Dropped From 20% To Zero – What Happens From Here

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THE FEDERAL RESERVE HAS 18 TRILLION REASONS WHY THEY CAN’T SEND INTEREST RATES HIGHER. WHAT HAPPENS TO OUR SAVINGS WHEN THE BUBBLE FINALLY BURSTS?

rob with fountain pen Interest Rates Just Dropped from 20% to Zero – What Happens From Here?

L. Todd Wood

For the past several decades, bond yields have grinded lower and lower, now reaching effectively 0%. Yet despite such a decline, there has been a lot of talk in the financial press of a growing bubble in the market.

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