Central banks hedging against geopolitical risk with gold

(October 11, 2017 - by Rurika Imahashi)

Large stashes are a handy weapon against currency jitters and US pressure

TOKYO -- Central banks around the world are adding to their gold stashes, particularly in emerging markets, as they try to shore up their currencies amid rising geopolitical tensions and, in some cases, to stave off U.S. economic pressure.

The total amount of central bank holdings of gold has risen by about 7% over the five years to 2016, according to the World Gold Council, a global trade group. Last year, central banks were net buyers of gold, for the seventh year in a row, according to Thomson Reuters GFMS. As of the end of July, they held some 33,400 tons of gold reserves in all.

Monetary authorities have been increasing their reserves of the precious metal mainly to defend their currencies. Analysts predict the trend will continue for a while.

Golden hoard

Russia, the world’s sixth-largest gold holder, was one of the major purchasers over the period. The Russian central bank expanded its gold reserves by 12% on the year to 1,729.4 tons at the end of July.

Because Russia depends on oil and natural gas exports for most of its foreign currency earnings, lower energy prices put strong downward pressure on the ruble. While the value of a currency is affected by the creditworthiness of a country, the value of gold is not subject to sovereign risk. Moscow is trying to protect the value of the ruble by increasing its gold reserves.

Another factor behind Russia’s growing gold pile is the economic sanctions the U.S. and Europe have imposed on it after it seized the Crimea from Ukraine. The West also accuses Moscow of fomenting a separatist fight in its neighbor.

Kazakhstan, in Central Asia, has been purchasing gold for nearly five years. Its holdings have surged 170% over that period to 280.9 tons, most of it mined domestically. The country prefers gold, which can be converted into various currencies, over U.S. Treasuries, whose values are affected by conditions in the U.S., said Itsuo Toshima, a market analyst.

At the end of 2011, Turkey began allowing commercial banks to use gold for the reserves they are required to hold at the central bank. The step was taken in response to the rapid slide in the Turkish lira brought on by the country’s worsening current-account balance and other factors. This has caused the central bank’s gold reserves to swell by about 60% in volume terms versus 2012 to 482.9 tons.

When the currency plunged again late last year, President Recep Tayyip Erdogan urged people to buy the lira and gold.