Behind the "Golden" Curtain: Russia's Economic War with the West

While the precious metals community has been preoccupied with Asian gold demand, Russia has been quietly boosting its gold reserves to record levels. In September, Russia’s Central Bank purchased over 37 tons of gold, its largest gold grab in 15 years. In October, they bought another 35 tons as central bank governor Elvira Nabiullina reported a haul of 150 tons of gold thus far this year … compared to just 77.5 tons for all of 2013.

According to the World Gold Council, over half of all the gold bought by central banks in the third quarter of this year, was bought by Russia. The Soviets have tripled their gold reserves since 2005, and the massive bullion buy-up now makes them the fifth largest holder of gold in the world, surpassing both China and Switzerland.

So what is behind all of this Soviet stockpiling? Clearly the Russians are taking advantage of lower gold prices. From an all-time high of $1923 oz. back in September of 2011, gold has been in an attractive correction for countries seeking to fill their vaults with the enduring value and political power of gold. With the precious metal down about 37% over the past three years, Russia is grabbing an opportunity to back the free floating ruble with a solid reserve asset.

The ruble has been in trouble all year, falling about 40% against the dollar since January. The Russian economy has also been under siege due to plummeting oil prices and the high cost of its military incursions into Crimea and Ukraine. There’s no doubt that world sanctions are also taking their toll. There have actually been three waves of international sanctions where the US, the European Union, Canada, Japan, Australia, Norway and Switzerland have all taken measures to punish Russian banking, businesses, energy firms, imports and exports, trade financing, technology development and individuals in Putin’s inner circle who are now subject to strict travel bans and asset freezes including all bank accounts and property.

So Russia has turned to gold to help reduce its growing economic instability. They understand that gold’s long history and physical presence acts as a critical safe haven that increases public confidence in government as well as in the central banking system.  Like most central banks, the Bank of Russia is not only thinking in terms of short-term economic fixes but also about the long-term fiscal security that robust gold reserves can provide.

And the Russians know something else about gold, it can be a powerful geopolitical weapon. They have made no secret of their desire to topple the dollar as the world’s reserve currency. So in the throes of economic self-preservation, the Kremlin is also waging an economic war with the West. Moscow’s massive gold build up helps to advance its long held diversification strategy away from US markets and firmly away from the US dollar. And as tensions continue to rise between Moscow and Washington, Putin has tightened his anti-dollar alliance with China as both countries have the common desire to systematically undermine and ultimately instigate the collapse of US currency.

In Russia’s quest for a new monetary order, they see gold as a central weapon and a big gun on the new economic battlefield where to the “victor goes the spoils” … of power, influence, control and global money.