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The Russians Are Laughing All The Way To The Bank (With This Gold Price)

President Putin Gold

The Russian currency is still in a bad shape as the Russian Central Bank still has to aggressively intervene in the currency market as its currency was depreciating at an extremely fast rate. In just two months time, the Ruble lost more than 20% of its value versus the dollar because huge capital outflows are killing the already struggling economy.

The Central Bank has continuously intervened in the markets to try to stabilize the value of the Ruble, but to no avail. The Western sanctions haven’t missed their impact as Big Money is leaving the country and flows into Euro’s and Dollars. In what seems to be a desperate move, the Central Bank has recently raised the key interest rate from 8% to 9.5%. This is an extremely aggressive interest rate increase which should reduce the cash outflows a bit as the inflation rate is ‘just’ 8%. This means that from Monday on, Russian savers will have a ‘real’ return on their savings accounts of 1.5% instead of 0.4%, which could lure some more citizens to stop converting Rubles into Dollars. However, we fail to see why this would stop the larger companies from withdrawing money.

USDRUB Exchange Rate

The USD/RUB Exchange Rate Source: Yahoo Finance

One of Russia’s main sources of dollar-generating income was its oil and gas production. However, the oil prices have come down fast, and this will not only result in a (much) lower inflow of US Dollars, but also in an expected budget deficit. As Saudi Arabia has publicly stated that it doesn’t really have an intention to reduce its output in order to get the oil price back up again, it doesn’t look like the Russian situation will be solved anytime soon. As Saudi Arabia has always been one of the strongest partners of the USA, it shouldn’t surprise anyone that an ally of the United States is driving the oil price down further just by making a simple statement.

As Russia produced almost 4 billion barrels of oil last year, every dollar the oil price drops decreases the revenue by $4B. So the recent $17 dollar drop per barrel of oil reduces the dollar revenue for the entire country by a stunning $68. And then people are wondering why Russia needs to increase the gas price for Ukraine.

Oil Fields in Russia

The Ruble is crashing, the interest rates are increasing as is the inflation rate (some goods which were previously imported now have to be sourced domestically at a higher cost). But there’s one thing Russia isn’t holding back on, and that’s spending money on gold. In an earlier column we indicated that Russia’s gold holdings were increasing month after month, and in the most recent filings at the International Monetary Fund, Russia seems to be stepping up the pace.

russia-gold-reserves

Source: Trading Economics

Whereas the central bank only bought a few hundred thousand ounces per month, it bought 1.2 million (!) ounces of gold in September, spending $1.5B on the yellow metal. And now the gold price has been trending lower in October, we wouldn’t be surprised at all if Russia bought even more gold. It will also be interesting to see if its satellite states like Kazakhstan also added to their gold holdings, as the latter added 16% more gold to its position in August and is on its way to have 30% of its reserve assets being backed by gold.

Bank of Japan

And it’s not just Russia and China you need to consider, as you can’t forget about Japan. Japan announced late last week that it was effectively expanding its quantitative easing program by accelerating it by 15-30% per year. Right now, the central bank of Japan is prepared to pump in excess of $700B per year in the economy. This doesn’t sound like much, but if you put it in perspective, Japan will increase its monetary base by almost 12% of its GDP. At the highest point of the QE program initiated by the Fed, the repurchase rate was $1.02 trillion dollars per year, but as the USA had a much larger GDP, its monetary base expanded by just 6.28% of the GDP per year.

We would have loved to show you some charts picturing the demand for gold in Japan, but after a huge increase in the gold consumption in the first quarter of this year – per Bloomberg: ‘sales for the quarter through March 27 were 249 percent higher than the same in three months in 2013.’ – no more data can be found. This is very interesting as it looks like Japan doesn’t want to draw any attention to the gold consumption pattern of its citizens.

We would have loved to show you some charts picturing the demand for
gold in Japan, but after a huge increase in the gold consumption in the first quarter of this year – per Bloomberg: ‘sales for the quarter through March 27 were 249 percent higher than the same in three months in 2013.’ – no more data can be found. This is very interesting as it looks like Japan doesn’t want to draw any attention to the gold consumption pattern of its citizens.

The Federal Reserve is ending its quantitative easing program, but the ECB is printing money, the Japanese central bank is printing money and the Russians and the Chinese are buying physical gold. The world economy is NOT doing better, it’s actually doing worse than expected, and this is hidden behind the smoke screen of printing money.

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