Wednesday, February 27, 2019

Tomorrow's Gold: Russia's Opportunity

In 2017, Polyus PJSC, Russia’s largest gold mining company, bought rights to Sukhoi Log, a prospective gold mine in Siberia. Then, in 2018, a study was conducted revealing just how much gold there was buried underground. Sukhoi Log hold approximately a quarter of all Russia’s known gold underground, or 63 million ounces [1]. Currently, the company has a 58.4% stake in the plot, and is eventually planning on buying the rights in its entirety. But what does a publicly listed mining company have to do with the Russian currency?

Here’s where it gets interesting. Polyus sells their gold exclusively to large Russian state banks, who resell it to Russia’s central bank. According to the article by the Wall Street Journal, that gold can be used to support the ruble, and can increase reserves for cushioning the Russia’s financial system in times of crisis. From an Austrian perspective, a gold-backed currency checks inflationary booms by the withdrawal from the reserve of gold, and the redemptions and cancellation of paper currency that follows. It sets limits for a currency to fluctuate, because it is bound by a limited supply.

Reviewing recent data from recent years shows that the Russian central bank is no stranger to increasing its exposure to the so-called “barbaric” metal. Since 2014, the country’s central bank has been increasing its gold reserves from around 10% to the roughly 17% it stands today. That upward trend is rather significant, even compared to China, whose reported reserves have been stagnant during the same period.

Spurred by increasing tensions with the US, including the recent US-imposed sanctions, Russia is acting in anticipation of moving away from a dollar reserve world. In mid-2018, Russia transferred nearly a $100 billion in US Treasury notes into yen and yuan [2]. Simultaneously, it bought 274.3 tons of gold, according to the World Gold Council. It now stands the Russia has more gold, in tonnes, than China (see photo below). As of November 2018, its stockpile of treasuries has around $12 billion [3], eliminating Russia from the US Treasury’s list of major holders [4].

But back to the ruble. Although the Russian currency has lost nearly a quarter of its value against the US dollar in 2018, the decision to move towards a currency backed by a commodity such as gold is a smart one. It could enlarge the means of payment, making it easier for Russia to pay cash for imports of finished goods and services. Furthermore, it would reduce the need for direct or indirect granting of credit to weak import-balance nations. If anything, the point to remember is this:

In a world where central banks see the solution to every problem as opening the floodgates of easy money, in the long run, it’s better to have backings in something intrinsically valuable, than to have blind faith in fiat.