In the media on Thursday of last week, an article appeared in the States stating that "Russia is selling its gold". This may have alarmed those in the gold world, until they looked carefully at the words. The article gave the impression that the central bank of Russia was selling gold. But what was the real story? Is Russia selling its gold from its foreign exchange reserves? If so, it is flying in the face of its government and the policy of its central bank.

Who is the Russia that is selling gold?

Gold-producing companies sell their gold after the gold has been refined at reputable refineries in their country. The government receives a report of the amount sold and a report of the amount of dollars or currency for which it was sold and ensures that the foreign currency returns to the country. This is a perfectly normal way for exporters to export any product. Mining companies all over the world follow the same procedure. Would it be correct therefore to say that the country is selling its gold? Certainly this is not what the gold market understands by "Russia is selling its gold". No, this is local Russian, gold mining companies exporting the gold they produced.

Hence, this cannot be defined as the country selling its gold, in the way the market understands it. If it were, then South Africa is selling its gold, so is Peru, Mexico and most other nations that host gold mines.

How a Country Buys and Sells its Gold

First we have to understand that when a 'country' buys or sells its gold it refers to the country's central bank buying or selling gold for the nation's reserves. Where this happens, gold is often bought from local producers. The central bank will simply agree with the local miner to pay him local currency for his gold at market-related prices. In all cases where miners export their gold, they are paid in local currency, once the proceeds of the sale of the gold are repatriated. But in the case of buying local production, no foreign exchange is involved, but the central bank pays the miners from its own resources.

Purchases of Gold by Russia over the Last Year

In some cases the central bank of the nation buys only a small amount direct from local miners. In other cases the central bank may buy the entire local production and in the most extreme of cases the central bank may buy the entire local production plus purchase from the physical market in London, usually at the Fixes. The ultimate way to buy gold is to buy all local production, buy more through London and then to encourage one's own citizens to buy gold from importers, such as China. In time of stress, the government will be able to take its own reserves and its citizen's gold from them.

Total Production in 2010 203 tonnes

Is the Russian central bank selling its gold? No, it's continuing to buy gold. When he was President, Mr. Putin instructed that Russia hold 10% of its reserves in gold. Since then the Russian central bank has been buying gold from local production as you can see from the World Gold Council's numbers above. With Russia producing around 203 tonnes a year from its mines, the last year's purchases amounted to 144.3 tonnes. Does the fact that it doesn't buy its entire locally produced gold mean it is selling its 'official' gold? The implication is that it is selling 'officially' owned gold, not its local mines' gold. The World Gold Council numbers state that local production is being purchased, but not completely.

What could be a possibility is that it is buying its gold from only a select number of local mines, as the gold becomes available, or it is exporting all its locally produced gold and buying gold for its reserves from the London market. We feel that if they were buying locally produced gold the tonnages purchased each month would show a smoother pattern.

So far the gold content of Russia's reserves is about 7.8% -up from 5.3% in January. The statement from its central bank read,

"The bank of Russia is not committed to buying any particular amount of gold," the bank said. "Nor is there any official target amount of gold purchases. The bank buys gold at a market price, and its buying intentions completely depend on the market conditions."

How's that for inscrutability?

Is the Russian central bank buying in London? That would explain the variety of monthly purchases as market conditions would throw up more on the falls than on the rises. A buying order that set the condition, "show me the offer and then I will decide", would fit in too. Even an eventual target of 10% of reserves would allow the central bank sufficient leeway to say there is no defined amount that they should buy. An earlier statement from the Russian government/central bank sources stated that, "Russia intended to buy at least 100 tonnes a year for its reserves."

Central Bank Discretion

Central banks have and will always be sensitive to declaring the exact state of its gold holdings and gold policies. This allows writers (on central bank gold) huge scope on what conclusions they wish to reach. Even Greece's 111 tonnes of gold is not up for grabs by the creditors of Greece, but there is a deafening silence over Greece's gold, despite its overwhelming debt.

Governments generally cannot interfere with the independence of their central banks. It is the central bank that decides the gold policy of reserves. In Germany, calls for gold sales by politicians were refuted. In France, the head of the French central bank, at first said that selling a nation's gold was like selling the family jewels. But then Sarkozy, France's Finance Minister ordered the Banque de France to do so, which it then did, in part.

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