The Massive Russian Bank Going All-In on Gold

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Central Bank of Russia
Founded in 1860, The Bank of Russia is the central bank of the Russian Federation. Konstantin Mikhaylovich Bykovsky designed the bank’s current headquarters on Neglinnaya Street, Moscow in 1894.  Image © Anton Belitsky/Global Look Press

Russia’s central bank has been a big buyer of gold for the past few years, but now comes news that one of the nation’s largest banks has been doing the same. See their motivations for doing so here.

Russia’s portfolio diversification blueprint is well-known. Over the past few years, the country has established itself as the top gold buyer by a significant margin. Its central bank buoyed gold prices and spurred demand on a consistent monthly basis, almost invariably dipping into double-digit tonnage purchases each month.

Heading up to 2018, there were a few other consistent sovereign gold buyers, though none approached the Kremlin’s appetite for the yellow metal. The voracious appetite has allowed Russia to both keep its currency afloat and lessen U.S. dollar dependence, the latter being a key method of avoiding sanctions. 2018 and 2019 were surprise years for many gold market watchers, as numerous countries went on a gold binge and China’s purchases actually overtook that of Russia. Similarly to the case of Russia, China’s spree had much to do with yuan oscillations and a rapid worsening of trade relations with the U.S.

Now, Russia’s central bank has found itself facing a new competitor in terms of bullion purchases, this time from the private sector. VTB Bank PJSC ranks among the nation’s biggest banks and is its second-biggest lender. In line with Russia’s general pro-gold attitude, VTB Bank employs a strategy that revolves heavily around physical gold trading.

It also boasts a gold stockpile that rivals that of many sovereign countries, let alone private institutions. As of October, the bank held a massive gold reserve of 59.5 tons, as well as the status of Russia’s top gold buyer. The second accolade was made possible as most central banks temporarily halted their purchases due to all-time high prices on the back of unparalleled investment demand.

VTB’s focus on gold has done wonders for its bottom line, as its bullion-trading profits so far this year exceed those of the previous three years combined. Among other things, the bank invests heavily into the mining sector, with its co-head of global banking Alex Metherell noting that Russia sports a favorable geographical position with abundant gold reserves.

Two weeks ago, VTB announced that it would launch Russia’s first gold-backed derivative. The expansion into the sphere highlights the bank’s expectations that gold will continue to outperform amid unprecedented global uncertainty after posting what is undoubtedly one of the best years on record. The launch of a gold derivative is certainly timely, as this year’s investment demand for gold has also translated to sky-high institutional holdings.

Commenting on the precious metals sector as a whole, VTB’s First Deputy Chairman Yuri Soloviev also said that platinum and palladium are poised to become big gainers as monetary stimulus is poured into the global economy, tying into expectations that silver is scheduled for a jump on the back of recovery-fueled industrial demand.

Why Gold Is One of Few “Safe” Bets Ahead of Election

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Why Gold Is One of Few "Safe" Bets Ahead of Election

Heading into one of the most heated elections since the Civil War, one fund believes that gold can help to protect from the tumult that is likely to follow. Here’s their strategy for the coming months.

The Dynamic Precious Metals Fund has been one of the best-performing funds so far this year, having gained 63% since January. The fund’s focus on precious metals in its portfolio allocation allowed it to outperform 82% of its peers, as gold surged to a new all-time high in an unprecedented bid for safety.

While gold’s climb has been powered by numerous red flags that persist, Dynamic’s portfolio manager Robert Cohen sees one factor in particular that should prompt investors to stick to the yellow metal. The 2016 U.S. election was especially hotly-contested, but the tumultuous events of this year have driven Cohen to label the coming November election as the most heated one since the Civil War.

With some expecting the election to stir the markets irrespective of the outcome, Cohen elaborated that investors might want to tighten their portfolio and lessen their exposure to various assets as November approaches. Despite this, Cohen sees gold as the one asset that looks to be a safe bet heading up to the election and onwards. Although the metal has fallen off from its August high of $2,000, it has continued to trade within a range above its previous all-time high, set in 2011.

According to Cohen, the bullish sentiment that currently surrounds gold is much more than a passing trend. General uncertainty might have been the overall theme as gold soared, but it was the historic stimulus issued by the Federal Reserve and the dip by real yields into negative territory that ultimately drove investors towards the asset. Even if the uncertainty dissipates, these factors will remain as powerful drivers, especially when one considers that the global bond market’s downfall has been inching gold up ever since last summer.

Cohen concurs, pointing to both the devaluation of currencies and the issue of sovereign debt as reasons why gold investors shouldn’t swerve too far off course. Prior to this year’s events, the U.S. was already dealing with a massive amount of debt that some economists were claiming to be near a tipping point. Now, the U.S. and countries around the world will need to up their government spending in order to reinvigorate their economies, causing the debt bubble to expand further. As Cohen points out, a sovereign debt default isn’t a likely or a plausible scenario, leaving money printing as the only remaining option. With a guarantee that nations around the world will erode their currencies through money printing, gold’s ability to protect one’s wealth and preserve purchasing power is bound to be displayed in full force, especially over the longer-term.