LONDON (TheStreet) -- Russia has gone on a gold-buying binge this year, but the move has done nothing to shore up the country's embattled currency, the ruble. And contrary to speculation, Russia will continue to buy gold through 2015.
Gold Hungry Russia and the Weak Ruble
Russia has been the world's biggest buyer of gold in 2014, adding 150 metric tons to its hoard and catapulting its holdings into the top five among nations. It stands at just shy of 1,170 metric tons, worth about $45 billion at today's prices. Russia now has its largest hoard since the last Romanov Tsar topped 1,200 tons, right before the outbreak of World War I.
Yet the ruble has plummeted -- an inconvenient fact for hard-money fans in the West who think central-bank gold buying is a mark of strong monetary policy. This week, the ruble closed near 70 to the dollar. It usually trades around 32.
Further, Russia has long been an aggressive buyer of gold. It was late in 2005 when President Vladimir Putin publicly approved a plan from the Central Bank of Russia to double national gold holdings. He set the target at 10% of total reserves by value, a level not seen since the 1998 ruble crisis. This policy is part of Putin's economic and political strategy. Gold is touted in Russia as a symbol of the country's power internationally. Since 2005, Russia has been among the biggest buyers of gold each year, especially in 2009 and 2010. In May 2010 alone, Russia bought about 34 tons of gold.
Why Russia Will Continue to Buy Gold...and Why It Won't Help the Price of Gold
Putin's gold policy isn't the whole story.
Despite leapfrogging China in gold holdings, Russia will continue to buy gold in 2015. The country has huge reservoirs of gold that have yet to be mined. Russia is now the third largest after overtaking the United States' gold mine output for the first time in a quarter century. But international sanctions due to the country's aggression in Ukraine have prevented Russia's mining companies from selling their gold on the open market. The logical -- and ready -- buyer has been Russia's central bank.
There is historical precedent. Buying output from domestic miners enabled the apartheid regime in gold-rich South Africa to sidestep some of the international sanctions imposed 25 years ago, doubling its holdings to 200 tons between 1990 and 1992. The only way Russia will pause its gold binge is if sanctions are eased. Expect Russia's gold binge to continue in 2015 -- but don't expect prices to go up because of it, as it will be mostly sating domestic supply.
The Lesson For Investors
If there's a lesson here for Western investors, it's that large government gold reserves are no guarantee of a strong currency or stable economy. Moscow's state reserves have done nothing to defend investors, not to mention private savers in Russia, who have seen the value of their ruble savings melt away over the past few weeks.
If the ruble continues to weaken, selling gold to buy rubles would be tempting for Russia. Former U.S. Fed chairman Alan Greenspan said that gold is the ultimate "crisis money" -- crisis being the operative word for Putin. Moscow's gold strategy over the last decade has made the metal a key symbol of Russia's revived strength and stability. The political power of today's huge Russian gold reserves is likely worth more to the Kremlin than its cash value.
Should Russia decide to sell gold, it would signal that this ruble crash is indeed the ultimate crisis for Putin's Kremlin. It would dent Moscow's claim to be "leaving the dollar dictatorship" which rules global trade by pricing nearly everything in U.S. money. That in turn would tarnish Putin's "strong man" image and huge approval rating at home as well.
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