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Traders Betting Russia’s Next Move Will Be to Sell Gold
by Debarati Roy | Dec 17, 2014 2:40 PM ET

Russia’s surprise interest-rate increase failed to stop the plummeting ruble. Another tool available to repair economic havoc caused by sanctions and falling oil prices: selling gold.

Russia holds about 1,169.5 metric tons of the precious metal, the central bank said last month. That’s about 10 percent of its foreign reserves, according to the London-based World Gold Council. The country added 150 tons this year through Nov. 18, central bank Governor Elvira Nabiullina told lawmakers. The Bank of Russia declined to comment on its gold reserves.

Russia’s cash pile has dropped to a five-year low as its central bank spent more than $80 billion trying to slow the ruble’s retreat. The currency’s collapse combined with more than a 40 percent tumble in oil prices this year is robbing Russia of the hard currency it needs in the face of sanctions imposed after President Vladimir Putin’s annexation of Crimea. A fall in gold prices signals that traders are betting that the country will tap its reserves, according to Kevin Mahn, who oversees $150 million at Parsippany, New Jersey-based Hennion & Walsh Asset Management.

“Russia is at a critical juncture and given the sanctions placed upon them and the rapid decline in oil prices, they may be forced to dip into their gold reserves,” Mahn said. “If it happens it will push gold lower.”

Gold futures for February delivery added less than 0.1 percent to settle at $1,194.50 an ounce on the Comex in New York. Futures slumped 28 percent in 2013.

Loan Collateral

“There are a number of ways that they could use their gold,” Robin Bhar, an analyst at Societe Generale SA in London, said today by phone. “They could use it as collateral for bank loans, or for loans from multi-lateral agencies. They could sell it directly in the market if they want to raise foreign-exchange” reserves, including to get more dollars, he said.

If Russia decides to sell, the figures to confirm the move wouldn’t be available for a few months, Bhar said.

Selling gold is usually “one of the last weapons” for central banks because some use the metal to help back their currencies, George Gero, a precious-metal strategist at RBC Capital Markets in New York, said in a telephone interview. “They are probably still accumulating gold and keeping it for a bigger crisis,” he said.

Russia has tripled its gold reserves since 2005, according to data compiled by Bloomberg. Its holdings compare with about 70 percent for the U.S. and Germany, the biggest bullion holders, the World Gold Council data show.

“Russia has been adding to their gold through the turmoil, and it’s their reserve asset, so they would utilize it ultimately,” Michael Widmer, metals strategist at Bank of America Corp. in London, said in a phone interview. “Utilizing can mean a whole range of things. They could use it to raise cash, or use it as swap, or use it as collateral.”

Ukraine Gold

Ukraine’s gold reserves contracted by about 35 percent to 26.1 metric tons in October, data on the International Monetary Fund’s website show. The nation is seeking to stave off a default as its economy shrinks under the strain of the conflict and spending cuts.

Gold prices fell 8.4 percent last quarter amid concern that the Federal Reserve would raise rates as the U.S. economy showed signs of improvement. The Fed will review the time frame for action on borrowing costs at the two-day Federal Open Market Committee meeting that ends Wednesday.

Russia’s central bank buys gold from the domestic market and from the nation’s bullion banks, the World Gold Council said.

“Gold may come under further pressure because of Russia,” James Cordier, founder of Optionsellers.com in Tampa, Florida, said in phone interview. “Oil prices are not on their side, so now the next option they have for raising cash is selling gold. There is some talk that the country has either started selling or is making arrangements to sell their gold.”

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