Are Chinese and Russian gold reserves challenging the US dollar?

The central banks of both China and Russia have been steadily increasing their gold reserves; as trade wars and sanctions loom how could this effect the global dominance of the US dollar?

Recent years have seen Russia and China attract international scorn and sanctions for a number of diplomatic and trade subversions. Russia’s annexation of the Crimean peninsula, election meddling overseas and support for pariah states such as Syria have spurred tension with the West and their partners. During this period of diplomatic difficulty, the Russian Federation has aggregated up to 1,890.8 tonnes of gold, worth over $80 billion (17.6% of total Russian reserves), recently surpassing China to become the nation with the fifth largest national gold reserves according to the World Gold Council. According to the official statistics of the Russian Central Bank, this is the largest quantity of gold held in reserve by Russia since president Vladimir Putin came to power in late 1999.

Like Russia, China has also experienced a distinct cooling of relations with the West. Beijing’s tacit support for Pyongyang has been seen as a sticking point, as have perceived trade misdemeanours, such as theft of intellectual property and alleged currency manipulation. During this time China has seen a similar aggregation of gold, amassing 1842.6 tonnes (although this is only 2.4% of total Chinese reserves).

Official Gold Reserves:

Russia has recently over taken China in terms of gold reserves. Both states have increased their holdings significantly. Source: The World Gold Council

China led the world in gold production volumes in 2016. Source: World Gold Council

Interestingly, China’s state gold purchasing has been propelled by an increase in domestic mining. Furthermore, Chinese legislation prohibits the export of excavated gold, ensuring the preservation of the resource within state borders. Such action demonstrates a clear belief in the value of holding gold, either in the ground or in your vaults, and complementing your reserves by buying more from other states.

The golden ratio

This accumulation of gold shows no signs of stopping and arguably represents a number of economic considerations as foreign markets and currencies potentially become less accessible for Russia and China.

Firstly, such stockpiling could simply represent a belief that gold is currently undervalued. The yellow metal has performed as one of the top commodities in the last year and this behaviour could be demonstrative of a simple speculation that gold is due a price rise.

Additionally, increasing state gold reserves could represent a comment on broader global uncertainty as traditional power forums and political processes lose gravity, not least because of the disruptive, zero sum, agendas of certain states – a reality many in the West believe both Russia and China epitomise.

For Russia, the rise in gold consumption has occurred in tandem with the rise in oil prices and a reasonable recovery of the rouble. To this end the move towards gold is likely to represent a search for stability and a store of value as volatile natural resources grow more precious in contrast to fiat currency. Since the collapse of communism, the health of Russia’s economy has been largely dependent on the price of oil and gas. In such a dependency, moving state wealth into gold, rather than the fluctuating rouble, makes good sense, especially following sanctions: Hence the role of gold as a diversifier of national reserves.

The price of oil has been incredibly volatile over the last 20 years. Source: Macrotrends, Price per barrel.

The rouble has struggled to hold value over the last decade. Source: Business Insider, USD/RUB.

According to hedge fund manager Mark Mahaffey, “China clearly continues to accumulate [gold] and updates its new reserves officially with a long lag time. This is much more likely to be a dollar hegemony challenge.” If this is the case, Chinese gold could spell the beginning of a new gold standard for the renminbi; prompting greater Chinese financial influence and independence from the US dollar as resources are exchanged in renminbi through programmes like the Shanghai oil exchange and greater Sino-centric trade is propagated through the belt and road initiative.

However, American castigation of Chinese policies under the Trump administration is likely to encourage greater disruptive behaviour and further neglect of the US dollar. “It is extremely foolish to judge bi-lateral trade surpluses,” says economist Dr Peter Warburton. “The economic benefits to trade are such that there is absolutely no expectation or requirement that individual countries have small bi-lateral balances. There are all many kinds of reasons why they occur, and they mean nothing in a healthy system. There clearly is a deep and justified concern over the effective theft of intellectual property and that probably is the sub-agenda for what America is doing.”

Time running out for the dollar?

Thus, if America intends to preserve dollar hegemony it is important to maintain free market trade and pursue a more intelligent sanction strategy in lieu of trade barriers. Otherwise, Russia and China may continue to put a premium on politically motivated purchases of gold.

Regardless of the agendas of these dominant players it is clear that tensions are rising. In fact, the small Asian nation of Kyrgyzstan intends to raise the volume of gold in their $2 billion international reserves in an attempt to shield against a possible trade war. “The rules of the game are changing,” Kyrgyz central bank Governor Tolkunbek Abdygulov told Bloomberg. “It doesn’t matter what currencies we have in our reserves; dollars, yuan or roubles all make us vulnerable.”