Azernews.Az

By Gulgiz Dadashova

All that glitters is not gold, and the currency reserves of a country should be taken with the grain of salt on one hand. Gold is held by central banks as one of their reserve assets alongside foreign exchange assets including US Dollars and Euros, and also IMF Special Drawing Rights.

Gold has always been a "safe haven" for investment in unstable times, as it currently is, given economic war between the West and Russia, vulnerable Middle East and prolonging solution to Iran's nuclear issue. Under these conditions, the currency becomes more unstable for state to keep high strategic currency reserves, while gold is more stable.

Despite the fall in recent days, the gold price increased by 10 percent in the first half of 2014, thereby recouping part of the epic fall in 2011-2013. Gold has rallied 5.9 percent this year as unrest in the Middle East and Ukraine boosted haven demand.

"Physical demand in the Far East did help buoy prices," James Steel, an analyst at HSBC Securities (USA) Inc., said. "Although geopolitical events do not normally drive prices longer term, they may have greater influence on gold in the near term. Bullion prices are likely to stay under pressure, especially if the U.S. dollar gains."

Today, gold and silver sank to 12-week lows as the dollar strengthened before data that may back the case for the Federal Reserve to raise borrowing costs at a time when the European Central Bank boosts stimulus.

Bullion for immediate delivery fell as much as 0.3 percent to $1,257.36 an ounce, the lowest level since June 10, and traded at $1,260.01 at 8:42 a.m. in Singapore, according to Bloomberg generic pricing. The metal is on course for a weekly decline after the ECB yesterday [September 4] unexpectedly cut interest rates.

Data today may show payrolls climbed by more than 200,000 in August for a seventh straight month after a report yesterday showed U.S. services expanded at the fastest pace in nine years. The dollar rose to a 14-month high against the euro as the first U.S. rate increase since 2006 is probable next year, while the ECB introduces additional measures to support growth.

"Gold fell after the dollar lifted following the ECB's decision to cut rates and start buying assets again, reducing the appeal of the precious metal as an alternative asset," Lachlan Shaw, an analyst at Commonwealth Bank of Australia said.

Such an unstable situation made gold more attractive tool for investors and states, as preserving the gold reserves is of intrinsic value to nations and therefore highly relevant in contexts of crisis and war. Gold can be used in portfolios to protect global purchasing power, reduce portfolio volatility and minimize losses during periods of market shock.

The latest international gold reserves data by the International Monetary Fund showed that in July, Russia raised its official gold reserves to 5.5 million ounces (1,104 tonnes). The latest IMF data also shows that in July, the National Bank of Kazakhstan, which is the member of the Russian led Eurasian Economic Union, added 45,000 ounces to its official gold reserves, taking its total holding to 5.1 million ounces.

According to the World Gold Council, over the last six months, Russia has increased its gold reserves by 54 tonnes. In the same period Kazakhstan has purchased 12 tonnes.

Russia now has the world's 6th largest gold reserves, officially higher than both Switzerland's 1,040 tonnes and China's 1054.1 tonnes.

Experts assure that the ongoing accumulation of official gold by Russia is part of a reserve diversification strategy. Some Russian analysts point to the threat of more western sanctions on more as a renewed catalyst for the Central Bank of Russia diversifying out of USD and euros by increasing its gold reserves.

As well as Kazakhstan, other countries in the region have also actively been increasing official gold reserves this year including Azerbaijan, Kyrgyzstan and Tajikistan.

Economist Ogtay Akhverdiyev, commenting to local media on the prospects of acquiring gold by Azerbaijan, said the precious metal is the eternal capital, but still it is dead capital as it cannot be invested in any project.

"Firstly, for investing gold should be sold, only the money can be an investment tool. Therefore, there is an unwritten rule that the proportion of gold in the gold and foreign exchange reserves of the country should not exceed 10%. Perhaps this figure varies in some countries. But changes tend to be small," the expert argues.

In this regard, the economist believes it unlikely that Azerbaijan will significantly increase its gold reserves. "It is unlikely that the proportion of gold in the international reserves will exceed 10 percent limit in Azerbaijan. President Aliyev earlier decided that the official reserves of the country can be invested in real estate and securities also," Akhverdiyev said.

Azerbaijan's strategic currency reserves, which currently exceed $50 billion, are formed of the CBA reserves, assets of the state oil fund SOFAZ and treasury of the Finance Ministry.

Azerbaijan's gold reserves were at the level of 10,273 tonnes in 2011, 11,277 tonnes in 2012 and 15,176 in 2013.

According to the August data of the World Gold Council, currently Azerbaijan's gold reserves hit 20 tonnes, which comprises 4.9 percent share in total foreign reserves.

The economist assures on the backdrop of the ongoing geopolitical events increasing the proportion of gold up to 20-30 percent of the total foreign exchange reserves - it's too much. "The question is, who can afford it. For example, the United States may hold a significant part of their reserves in gold due to the fact if the United States will need money, they just turn on their printing press and will publish them, as 80 percent of international trade are made in dollars. Elsewhere, the situation is different. For example, China is booming, but cannot increase the transaction in Yuan, due to the fact that most of the imports are made in dollar.

Azerbaijan has managed to hedge against currency instability at certain extent. The country's strategic currency reserves are kept in euro, the other - in dollars. Thus, fall in rate of one currency repays it in increase of the other's rate jump," the expert said.

As for the world official gold holdings, the Unites States leads with 8,133.5 tonnes (72 percent of the country's international reserves). The country is followed by Germany with 3,384.2 tonnes (68 percent of reserves), a unique country preferring to keep most of their gold in other countries: the United States (about 33 percent), in London and Paris (about 25 percent).

In third place on the gold reserves in the world is the International Monetary Fund (2,814 tons), followed by Italy (2,451.8 tonnes, or 67 percent of reserves), France (2,435.4 tonnes, or 65 percent of reserves), Russia , China (1054.1 tons, or 1 percent of reserves), Switzerland (1,040 tons of gold, or 8 percent of reserves), Japan (765.2 tons of gold, or 2.5 percent of reserves) and the Netherlands (612.5 , or 54.3 percent of reserves).

Domestic opportunities

Recently, Anglo-Asian Mining plc, a company extracting precious metals in resource-rich Azerbaijan, announced further positive exploration updates from new drilling undertaken north of Gadabay mine.

The volume of the discovered deposit is higher than previously expected amount. Gold reserves have doubled in Azerbaijan due to deposits found in recent years. In the last ten years, 192 deposits of various profiles were put on the balance in 25 regions of the country.

AAM produced 15,736 ounces of gold extracted in the Gadabay complex ore in the second quarter of 2014. This represents a 39 percent increase over the first quarter. It produced 11,318 ounces of gold in the first quarter of 2014.

About 150 kilograms of gold produced in the country has been transferred to the Central Bank of Azerbaijan in 2013, according to the 2013 government report presented to the Azerbaijani Parliament.

The Swiss MKS Finance S.A. company conducted cleaning of the produced gold after which, 4790.5 troy ounces in gold bullion (149 kilograms), was placed in storage of the CBA.

Anglo Asian Mining, a cash generative and profitable gold and copper mining and exploration company, started gold and silver production in May 2009 and copper concentrate production in 2010 at the Gadabay mine.

The company has the rights to develop six deposits in the south-west of Azerbaijan - Gadabay, Ordubad, Gosha Bulag, Gyzyl Bulag, Vezhnali and Soyutlu, under a production sharing agreement signed in August 1997 with Azerbaijan's government.

The gold and silver produced there are sent to Switzerland for refining, and gold bars are delivered to the country and preserved by the government.

Gold prices in country

The price of gold in Azerbaijan varies depending on the situation on the world market. Currently, the cost of an ounce of gold is 992,532 manats [$1 is 0.784 manats].

The Chairman of the Center for Economic and Social Development, Vugar Bayramov told local press in September, Azerbaijan does not expect significant changes in the value of gold, the situation is stable, because such changes are not expected on the global market.

The reason lies in the fact that there is a decrease in demand for gold, which in turn, is mainly due with growth, which is observed in the United States economy. Economic growth in the United States has led to increased investment in dollars and shares of the country. That is is why you should not expect an increase in the value of gold on the world market, the expert said.

Bayramov noted that Azerbaijanis hold more weddings and other celebrations in September. "Therefore we do not expect fall in the value of gold in the country. Overall Azerbaijan will see stability in the value of gold, but in the following months the cost will vary depending on the situation on the world market.

Purchasing gold during the early days of fall has proved to be a winning trade for most of the last two decades worldwide.

September is historically gold's best month due to India's rising gold demand at the time. Over the last 20 years, the precious metal has seen an average gain of 3 percent in September.

So, make no mistake, gold is still alive.