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Will There Be Forced Official Sellers Of Gold?

Tyler Durden's picture




 

Submitted by Pater Tenebrarum via Acting-Man blog,

Possible Side-Effects of Plunging Commodity Prices – A Look at Russia

One of our readers wrote to us with a question on a topic that will surely be of interest to a wider audience. Here is what he asked:

“As FX reserves dwindle, surely there is some potential that Russia may be forced seller of Gold? I understand your views re gold market, but would be most interested to hear your thoughts on the possible impact? Are there other options? Talk of gold backed RUB, default on USD debts, etc.

It is clear that a number of major oil producers are in severe trouble. However, Russia’s central bank has actually increased its gold reserves in recent months. It is now the world’s 5th largest official holder of gold, after increasing its stock pile to 1,150 tons in September (the most recent data available).

To this it must be kept in mind that Russia itself is a major producer of gold, the third largest in the world in fact, mining about 250 tons per year. The central bank is involved in the marketing of this gold, acting as an intermediary for producers. Still, in spite of increasing its gold reserves quite a bit, they still only represent about 10% of Russia’s total reserves. Here is by the way a chart of gold in ruble terms:

 

gold in rubles

In ruble terms, gold is at a new all time high – click to enlarge.

So why has Russia’s central bank actually accelerated its gold buying (i.e., has retained more of the gold it markets for local producers than normally) in the face of increasing pressure on its foreign exchange reserves? As one commentator remarked:

From the perspective of a sovereign which is concerned about aspects of geopolitical risk, it makes sense that they would have a bias toward physical gold,” Brian Lucey, a finance professor at Trinity College Dublin and formerly an economist for the Central Bank of Ireland, said today by phone. With lower gold prices, Russia may have viewed it “as good a time as any to pick it up,” he said.

Russian officials think about this exactly as Alan Greenspan does. When Greenspan was once asked why the US treasury shouldn’t sell its remaining gold reserves, he pointed out that in extremis, such as in times of war, gold is absolutely certain to remain a viable means of payment that will be accepted by everybody. He cited the experience of Germany during WW2 to buttress this claim empirically.

We would also note that while Russian reserves have been under pressure due to capital flight and misguided attempts to defend the ruble’s exchange rate with forex market interventions, its current account has been consistently positive since the mid 1990s:

 

russia-current-account

Russia’s current account remains in surplus – click to enlarge.

The current account surplus may come under pressure as well in light of plunging oil prices, but Russia has used the years of plenty to build up a “rainy day” fund amounting to about $470 billion in addition to its central bank reserves. The current situation is presumably precisely what Russia’s government had in mind when it did that.

Note as an aside that the Russian government is in a very strong fiscal position – the kind most developed nations can only dream of. This is now also bound to deteriorate somewhat (although not as much as one might expect, as the ruble price of oil has barely declined), but Russia certainly still has a lot of fiscal flexibility:

 

russia-government-debt-to-gdp

Russia’s public debt to GDP ratio. The government is nearly debt free. As an aside, there is a flat personal income tax rate of just 13% in Russia – click to enlarge.

 

WTIC

WTIC crude oil, monthly – as can be seen, prices are now back to where they already were in 2005-2006, pressuring all major oil producers – click to enlarge.

 

Readers may also recall that Mr. Putin has recently been persuaded by the free-market oriented faction of prime minister Medvedev that he should finally do something about official corruption, as a means to counter the effects of economic sanctions (see: “Russia Moves Toward Increasing Economic Freedom” for details). Putin agreed, as he evidently understands that Russia’s economy needs every bit of help it can get. We recently had official confirmation of the new approach in Putin’s annual address to the Duma. Here are what we believe are the most important points:

I propose a full amnesty for capital returning to Russia. I stress, full amnesty. Of course, it is essential to explain to the people who will make these decisions what full amnesty means. It means that if a person legalises his holdings and property in Russia, he will receive firm legal guarantees that he will not be summoned to various agencies, including law enforcement agencies, that they will not “put the squeeze” on him, that he will not be asked about the sources of his capital and methods of its acquisition, that he will not be prosecuted or face administrative liability, and that he will not be questioned by the tax service or law enforcement agencies.

 

[…]

 

It is essential to lift restrictions on business as much as possible, free it from intrusive supervision and control. I said intrusive supervision and control. I will consider this in more detail later. I propose the following measures in this regard.

 

Every inspection should become public. Next year, a special register will be launched, with information on what agency has initiated an inspection, for what purpose, and what results it has produced. This will make it possible to stop unwarranted and, worse still, ‘paid to order’ visits from oversight agencies. This problem is extremely relevant not only for business, but also for the public sector, municipal institutions and social NGOs.

 

Finally, it’s crucial to abandon the basic principle of total, endless control. The situation should be monitored where there are real risks or signs of transgression. You see, even when we have already done something with regard to restrictions, and these restrictions seem to be working well, there are so many inspection agencies that if every one of them comes at least once, then that’s it, the company would just fold. In 2015, the Government should make all the necessary decisions to switch to this system, a system of restrictions with regard to reviews and inspections.

 

Concerning small business, I propose establishing ‘holidays from inspections’. If a company has acquired a good reputation and if there have not been any serious charges against it for three years, then for the next three years it should be exempted from routine inspections by government or municipal supervisory agencies. Of course, this does not apply to emergencies, when there is a danger to people’s health and life.

 

Business people talk about the need for stable legislation and predictable rules, including taxes. I completely agree with this. I propose to freeze the existing tax parameters as they are for the next four years, not revisit the matter again, not change them.

 

Meanwhile, it is important to implement the decisions that have already been made to ease the tax burden. First of all, for those who are just setting up their operations. As we have agreed, two-year tax holidays will be provided to small businesses registering for the first time. Production facilities that are starting from scratch will be entitled to the same exemptions.

(emphasis added)

It should be obvious that if this program of liberalization is successfully implemented, it will do a lot to halt capital flight – more than the capital repatriation amnesty would do by itself. However, the two proposals go hand in hand: if owners of “flight capital” can be persuaded that official corruption is going to be successfully tackled and state interference with private enterprise will be significantly reduced, they have a big incentive to bring some of their funds back.

We would conclude from all this that the danger that Russia will become a forced seller of official gold reserves is fairly low for the time being.

 

Venezuela under Great Pressure

Socialist Venezuela is under far greater pressure to sell or swap some of its official gold holdings. We recently showed this chart of the black market Bolivar rate, which is a reflection of the dire straits the government finds itself in:

 

Bolivar black market rate

The bolivar has collapsed in the black market in Cucuta (a border town with a flourishing foreign exchange trade) – click to enlarge.

 

Under both Nicolas Maduro and his predecessor Huge Chavez, plenty of welfare spending and other government handouts have been funded with the country’s oil income. This policy was combined with massive inflation of the local currency, fixed exchange rates and price controls. As a result there are now shortages of goods as well as a growing shortage of foreign exchange reserves. The government is increasingly unable to pay for imports and foreign debt coming due concurrently. Its social spending has become unaffordable too. So there is a good chance that Venezuela will eventually be forced to sell some of its official gold holdings.

However, as we always point out, such news can at most have a short term psychological impact on the gold market. The gold market is so big that Venezuela’s potential sales won’t even be noticed.

Besides, it should be obvious by now that central bank gold buying in recent years has not helped the gold price one bit – QED.

Conclusion:

A few nations may indeed be forced to sell some of their official gold reserves as a result of plunging oil prices. It seems however not likely at this juncture that Russia will be one of them. Moreover, the impact on the gold market should be quite limited. We will discuss the other parts of the reader question above next week (i.e., the possibility of introducing a gold-backed ruble and the possibility of defaults on USD denominated debt).

 

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Sun, 12/07/2014 - 15:10 | 5526259 Joebloinvestor
Joebloinvestor's picture

I kind of hope that they dump US bonds first.

WHEEEEEEEEE!

Sun, 12/07/2014 - 15:30 | 5526292 Sudden Debt
Sudden Debt's picture

They're using those bonds through their offshore banks to get their dollars for their industry.
The state is actually supplying the private sector with dollars because of the sanctions and it's the only way to import their commodities.
And if those bonds run out, they'll import it all through China.and the rest of the bricks.

And that's actually what's going to kill the dollar so it doesn't make sense that America is going against Russia for just Ukraine, it's totally not worth it unless there's a different agenda.

Sun, 12/07/2014 - 17:38 | 5526535 sun tzu
sun tzu's picture

You're assuming that US foreign policy is supposed to make sense.

Sun, 12/07/2014 - 18:33 | 5526653 OpTwoMistic
OpTwoMistic's picture

US policy is just invade and steal it.  Why buy?

Sun, 12/07/2014 - 20:17 | 5526931 outamyeffinway
outamyeffinway's picture

If oil is anything like gold it will plunge right through that moving average line. And fuck off too. I hope every shale oil company goes bust just because. Why? Cuz I'm jaded.

Sun, 12/07/2014 - 15:36 | 5526304 sampo
sampo's picture

If they cut Russia out of Swift, then what options do russian billionaires have but to bring their wealth home in phyzz, which will face FULL amnesty?

 

Brilliant!

Sun, 12/07/2014 - 16:15 | 5526341 Winston Churchill
Winston Churchill's picture

The Russians will roll out their alternate and the US will force their export customers  to use it in trade

settlement.

Putin may well have set a trap for the US, and wants them to kick Russia out of SWIFT.

There may be others reasons as well that Putin has for delaying the launch.

Could be further time for rearmament or letting the other BRICTS get more prepared.

Sun, 12/07/2014 - 16:55 | 5526393 ebworthen
ebworthen's picture

Russia, China, and the rest eager to end Dollar hegemony for sure.

FYI fellow Gold lovers: 

1 oz Pamp Suisse Gold bar in assay for $1,194, or $1,094 if you pay with paypal.

On ebay, via APMEX, free shipping, use code SCE7XEN3NR if paying with paypal to get -10% off.

http://www.ebay.com/itm/1-oz-Pamp-Suisse-Gold-Bar-New-Design-In-Assay-SKU-84698-/121417276792

Sun, 12/07/2014 - 17:25 | 5526509 Uchtdorf
Uchtdorf's picture

The code was not accepted.

Sun, 12/07/2014 - 17:38 | 5526522 ebworthen
ebworthen's picture

Maybe I copied the code wrong.  Look for the "Pay only $1,094.60 [ Show me how ]" link right below "Free Shipping".

To use the code you have to pay with paypal, hope that helps and works, great deal if it does.

Sun, 12/07/2014 - 17:57 | 5526570 Uchtdorf
Uchtdorf's picture

My ebay screen for paying with paypal says that free shipping is standard on this deal with no link for "Pay only $1,094.60..."

Thanks for trying to share what would have been an excllent deal.

Sun, 12/07/2014 - 18:05 | 5526583 Pool Shark
Pool Shark's picture

 

 

That option isn't appearing for me either...

 

Sun, 12/07/2014 - 20:53 | 5527002 ebworthen
ebworthen's picture

Dang it, it disappeared for me too, must have been too popular!

Still a good price for an ounce at $1,194 and free shipping.

Sun, 12/07/2014 - 16:50 | 5526430 kchrisc
kchrisc's picture

"which will face FULL amnesty?"

If one listen carefully, he can hear the echo of Putin's latest cry of "check!"

An American, not US subject.

 

While preparing for fighting tyranny at home, I am enjoying watching Russia fight tyranny in Europe.

Sun, 12/07/2014 - 15:14 | 5526265 himaroid
himaroid's picture

The long awaited deflation.

To be used as an excuse to go all zimbabwe.

Take advantage.

Sun, 12/07/2014 - 15:16 | 5526273 Bloppy
Bloppy's picture

Even my young son uses his allowance money to buy silver coins. Figured that out himself. I didn't tell him to do that. Maybe he's smart, or maybe it's that obvious.

 

 

Sun, 12/07/2014 - 15:26 | 5526284 himaroid
himaroid's picture

Chip off the old block.

Sun, 12/07/2014 - 15:33 | 5526296 Gringo Viejo
Gringo Viejo's picture

Already have been forced sellers of gold.

Iraq, Libya, and Ukraine come to mind........

Sun, 12/07/2014 - 16:37 | 5526395 Pareto
Pareto's picture

+1 well done.  you must have taught him something.....the fact that he gets an allowance....probably the most important thing right there....that nothings free and that if you want something, you have to work/save for it.  i remember getting an allowance - god damn it was never EVER enough! lol.  but, it forced one to reconcile and rank priorities and all sorts of intermporal considerations.  and ultimately, because the allowance was in short supply relative to the uses one might have planned for it, it forced one to recognize that the only solution to the problem was to: (1) do without, or (2) work for it.  Of course, (2) brought with it all kinds of opportunity and opened all sorts of doors and new things - this thing of work.  I think people understimate the knowledge that is transferred and gleaned through the mechanism of an allowance.  so simple, yet so powerful.

Sun, 12/07/2014 - 16:50 | 5526425 infinity8
infinity8's picture

Yeah, I wasn't satisfied w/my "allowance" so, I went about finding other ways to earn $$. Saved my ass, over the long haul.

Sun, 12/07/2014 - 16:58 | 5526445 infinity8
infinity8's picture

I don't remember where I heard it first or to whom it should be attributed but, "Man is like a horse, he NEEDS to work. So true: Ween, With My Own Bare Hands

https://www.youtube.com/watch?v=jFSB0jBdSD0

Sun, 12/07/2014 - 15:14 | 5526267 Uncle Sugar
Uncle Sugar's picture

This could finally know gold to the $500 I've been hoping for so I can reload my canoe.

 

Sun, 12/07/2014 - 16:13 | 5526352 Winston Churchill
Winston Churchill's picture

Makes nice boat ballast painted lead grey.

Sun, 12/07/2014 - 17:42 | 5526543 hungrydweller
hungrydweller's picture

Please bring it on!

Sun, 12/07/2014 - 15:20 | 5526275 fiftybagger
fiftybagger's picture

As bilateral trade deals increase the need for forex reserves necessarily decreases I would presume.

Sun, 12/07/2014 - 15:21 | 5526277 The Duke of New...
The Duke of New York A No.1's picture

The Oil Producing countries could just demand to be paid in Gold for their energy exports - then many problems solverd all at once;

 

http://youtu.be/Bc7Urzm0QE8?t=14m17s

Sun, 12/07/2014 - 15:33 | 5526295 Headbanger
Headbanger's picture

We would nuke them first.

Sun, 12/07/2014 - 15:38 | 5526305 The Duke of New...
The Duke of New York A No.1's picture

Russia is the only one with a big enough stick to pull this off .... but once Russia initiates, the less powerful countries will evetually follow.

 

 

Sun, 12/07/2014 - 16:54 | 5526439 kchrisc
kchrisc's picture

"Russia is the only one with a big enough stick to pull this off .... but once Russia initiates, the less powerful countries will eventually follow."

You just channeled the western Zionist banksters' worse nightmare.

An American, not US subject.

Sun, 12/07/2014 - 17:43 | 5526544 hungrydweller
hungrydweller's picture

Russia's "checkmate".

Sun, 12/07/2014 - 15:23 | 5526280 THE DORK OF CORK
THE DORK OF CORK's picture

Ehh Brian Lucy has little credit in Ireland.

 

He is the John candy of Irish economics.

 

He had no problem with the Irish house hyperinflation right up to the bust.

I have seen his name crop up in British trade stats recently.

Changing their post 1986 position on gold.

You cannot trust Central bank officials period.

Gold is the bankers currency.

They refused to inflate the stuff during the bust causing a seizure of useful assets by their commercial banking buddies.

Brian Lucy talking positively on gold turns me bearish out of instinct.

 

Sun, 12/07/2014 - 15:27 | 5526286 Conax
Conax's picture

The Russian government's finances are in better shape than our own with less debt and a growing stack.

You don't stack just to sell out the first time you hit a few bumps in the road.

Sun, 12/07/2014 - 15:43 | 5526310 Dame Ednas Possum
Dame Ednas Possum's picture

Gotta like Vlad's style...he hits the bumps, and he doubles down.

The man has big balls.

Sun, 12/07/2014 - 15:30 | 5526291 The Duke of New...
The Duke of New York A No.1's picture

If the Oil Producing countries started demanding to be paid even just partially in Gold for the energy exports (IE: 25% Gold) ... you'd see the largest reversal of fortunes in the quikest period of time in mankind's history, IMO...

 

http://youtu.be/Bc7Urzm0QE8?t=14m17s

Sun, 12/07/2014 - 17:43 | 5526542 sun tzu
sun tzu's picture

More like 13% gold for the flat tax. The Russian oil companies can choose the currency for their share of the sales. The 13% going to the government should be in gold. 

Sun, 12/07/2014 - 15:43 | 5526312 THE DORK OF CORK
THE DORK OF CORK's picture

More then any other central bank in history the icb increased costs without increasing credit ( especially post 79)

I say this quite seriously.

The Irish people were better off dancing at the crossroads and never allowing that dastardly bunch of vipers onto our  island.

They have successfully plotted the total destruction of the Irish nation.

I ask you :

Would you trust the advice of one of its operatives ?

Sun, 12/07/2014 - 15:50 | 5526319 45North1
45North1's picture

Putin channels Reagan in many ways....

Sun, 12/07/2014 - 15:51 | 5526321 himaroid
Sun, 12/07/2014 - 16:15 | 5526353 Platypus
Platypus's picture

The problem for Russia and others is that the dollar value will increase long term. At least for the next 15 years the trend will be up.America will take care of allied countries like Saudi Arabia etc but the unfriendly ones will be on their own. American industries will be repatriated from places like China so due to more jobs and consumption internally inflation and interest will raise. The capital flux already inverted. Money is coming back to America. The next cycle is America growing and the BRICS shrinking. Oh ! And due to all those facts Russia and others will not be able to handle the squeeze and will be forced to sell their gold. Nominally they will sell it higher but inflation adjusted their gold transaction will turn into a net loss.

Sun, 12/07/2014 - 16:28 | 5526378 Idaho potato head
Idaho potato head's picture

So, black is white and lies are truth, same as it ever was...gotcha
Then Crimea will be repatriated to merca...

Sun, 12/07/2014 - 17:28 | 5526516 realWhiteNight123129
realWhiteNight123129's picture

Platypus. A currency backed only by credit (pure paper currency) is always only as good as the credit backing it. As Pimco said in 2011, the US is Greece in terms of internal debt and external debt. The only thing maintaining is that the world trade (which produces excellent credit) also backs the USD. When China starts to get its trade and other nations start to use something else (as the reserve currency always followed trade... I suggest you read Gilbart from teh XIX century on the history of banking in the 700 yers leading to the XIX century).  When the shift occurs, the USD has only one way: down. 

As Henry Thornton explained, they are two factors explaining FX. 1. One is fundamental and long term, the 2. is due to capital flows.

We ahve strengthening of teh cpital flows, but the trade balance ex oil is ugly. 

The onyl way to curb consumption and restore terms of trade is to accept bankrupty for all over-levered actors (including the gov).

So the gov will not do that so item 1. terms of trade will stay horrendous.

As for 2. It is a combination of factors which is making a knee-jerk capital flow to the USD "safe heaven" which is ill-conceived because the dollar external debt is horrendous and internal debt is horrendous. But the flow makes things look temporarily of a "strong dollar".

When total debt to GDP is very low, US has a trade surplus, and raets are positive in real terms in the US, call me, I might want to hold the USD long term.

 

Sun, 12/07/2014 - 17:46 | 5526547 sun tzu
sun tzu's picture

You make no sense at all. A stronger dollar means imports are cheaper. Manufacturing will leave the US. Capital might come to the US but it will be for investment in the markets, not industry. Once again, WS wins and MS loses. Strange how it always happens that way.

Mon, 12/08/2014 - 09:25 | 5528104 Platypus
Platypus's picture

If a stronger dollar means import cheaper, how come we are importing from China all along the dollar bear cycle? A strong dollar will repatriate industries because they want their profits in dollars ( the stronger currency) not in yuan. On top of that the government will play with international tariffs to make imports less appealing. They need the industries here so we have more jobs, more consumption so inflation can raise and interest rates to climb. In this scenario the external debt will be corroded. It is already starting. just go to a dollar store and check on how American and Canadian products are starting to creep in.

Sun, 12/07/2014 - 21:16 | 5527050 GoldSilverBitcoinBug
GoldSilverBitcoinBug's picture

Said the guy who have a country with 18 Trillion of debt...

Mon, 12/08/2014 - 09:16 | 5528077 Platypus
Platypus's picture

You are not taking into account that the American debt is IN LOCAL CORRENCY. America has total control over is currency so they can manipulate it as they want. According to my calculations interest rates will go higher than in the 80s. So lets say you have 17% interest rate and real inflation around 20%. In two and a half years you corroded more than half of your debt.

Sun, 12/07/2014 - 16:42 | 5526408 alexcojones
alexcojones's picture

Why couldnt a country print more fiat, convert that paper to dollars, send buyers over here to the LCS and buy gold hand over fist?

I see scads of gold coins at my LCS and there they sit because drought dried up my pond and my truck is in the shop.

Sun, 12/07/2014 - 16:44 | 5526410 kchrisc
kchrisc's picture

"Will There Be Forced Official Sellers Of Gold?"

I don't know about the CBs and institutions, but as for the people:

https://en.wikipedia.org/wiki/Executive_Order_6102

It is only time before a new Executive Treason Order comes down in benefit of the banksters.

An American, not US subject.

 

"Yes, you activate my gold vault by putting your head in there. That's it. Now hold still while I activate it."

Sun, 12/07/2014 - 16:55 | 5526438 q99x2
q99x2's picture

Join Russia and/or die at the hands of the NWO M'Fers.

Sun, 12/07/2014 - 17:22 | 5526498 realWhiteNight123129
realWhiteNight123129's picture

Time to buy the Ruble, and Russian stocks. Low taxes, reduction of government interference and low government debt to GDP. Next thing you know they´ll make Ron Paul an honorary citizen of the Federation of Russia, they already have the American dissident Swowden protected from the American State Police (NSA, which is a modern form of the East-Germany Stasi...), now they are liberalizing their economy.

JUDO is the art of using your opponent´s strength to your own advantage. The Russia Federation is embracing true capitalism, this is the way to go...

Looks like FACTA won´t be enforced for American bringing assets in Russia.

 

 

Sun, 12/07/2014 - 18:09 | 5526593 Zombies On Toast
Zombies On Toast's picture

This is so funny. Putin, once a member of the Communist Party and KGB Colonel, has done this:

1) Russia has almost no government debt

2) Russia has a current account surplus

3) Russia has a flat personal income tax rate of 13%

Something the Tea Party can only dream about! LOL

 

 

 

Sun, 12/07/2014 - 18:59 | 5526604 Quinvarius
Quinvarius's picture

Venezuela just made gold part of their banking system.  They don't need to sell it to monetize it.  It already counts.  That is what is going to happen, no matter what the paper price does.  It is a fantasy that non US clients will just dump their gold.  There is no reason to sell it if it already counts as cash.  And there is no reason to count it as anything other than that if you are not part of the gold ponzi.

Sun, 12/07/2014 - 18:48 | 5526683 bluskyes
bluskyes's picture

That doesn't mean an of us will be able to buy it at the lower prices.

Sun, 12/07/2014 - 21:19 | 5527069 GoldSilverBitcoinBug
GoldSilverBitcoinBug's picture

Russia embracing Free Market and Capitalism: good !

Doing things for business especially the small one is only good for your economy, the USSR is in Europe and USA now.

Remove bureaucratic corruption and hindrance and you will kick ass.

Sun, 12/07/2014 - 21:44 | 5527132 Cheduba
Cheduba's picture

"Huge" Chavez lol

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