Why Is Putin Stockpiling Gold?

Bret Arends

President Vladimir Putin of Russia is stockpiling gold as fast as he can: that can’t mean anything good. Russia has more than doubled its gold reserves in the past five years. Putin has built the world’s fifth-biggest gold pile, and is buying about half a billion dollars’ worth monthly. His moves may matter to your finances, because there are two ways to look at gold.

On one hand, it’s an investment that generates no cash flow and serves no practical purpose. But gold is the most liquid reserve in times of turmoil, or worse.

The US, which has dominated the world’s economy for several lifetimes, is in relative decline. According to the IMF, the US is on track to lose its status as the world’s biggest economy to China by 2017.

We will be the first people in two hundred years to live in a world not dominated by either Britain or the US. This changing of the guard is never peaceful. The declines of the Spanish, French and British empires were all accompanied by conflict. The decline of British hegemony was a leading cause of the First and Second World Wars.

Maybe this will turn out better than similar episodes in the past. Maybe China will embrace an open society and the rule of law. If so, there is probably no reason to own gold. On the other hand, we may be about to enter a much more turbulent and dangerous era of power politics and international competition.

Not long ago, world gold reserves were mainly in the hands of the US and the Europeans. But that’s changing. China, Saudi Arabia and Russia are now in the top five. Western European countries have been selling gold. If the current financial crisis gets any worse, they may have to sell more.

Emerging markets have been buying. China, despite recent buying, holds less than 2% of its currency reserves in gold. How long will emerging countries want to hold their reserves in any currency that is controlled by someone else? Putin clearly doesn’t want to. Gold now accounts for 9% of Russia’s reserves, and that figure is rising.

Gold has corrected since peaking at around $1,900 an ounce a year ago. It fell as low as $1,566 in June. Since then, it has risen to $1,735. The shakeout was exaggerated by a (temporary) US dollar rally. Put another way: Priced in euros, gold is nearly back to its old high. It’s €1,343 euros per ounce, just shy of the €1,356 euro record set a year ago

source: marketwatch