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Gold Games: follow or refrain?

27 November 2014 18:38 (UTC+04:00)
Gold Games: follow or refrain?

By Gulgiz Dadashova

Russia’s gold rush in efforts to distance itself from the US dollar has encouraged several states to seek the protection and diversification of gold and now central banks are faced with a dilemma: to sell or buy?

The country raised holdings by 1.6 percent to 1,168.7 tons by late October. Russia bought about 150 tons this year which most will be remembered with sanctions on Moscow over its policy over Ukraine. The country has tripled its gold reserves since 2005 and is holding the most since at least 1993, IMF data show. Kazakhstan, which may not always agree with Moscow’s political line, however is in agreement with the Kremlin in the Eurasian Economic Union, followed its neighbor, and also increased gold purchases.

Gold value fell to the lowest level in a week as assets in the largest exchange-traded product backed by the metal shrank to the smallest in more than six years, as the market awaited a Swiss referendum on central bank gold reserves. This weekend Swiss voters should decide whether the Swiss National Bank (SNB) should hold at least 20 percent of its assets in gold, all of which have to be stored in the country and never be sold to anyone.

Bullion for immediate delivery lost about 0.4 percent reaching $1,192.95 an ounce, and traded at $1,193.79 in Singapore on November 27, extending just recent 0.3 percent drop, according to Bloomberg generic pricing. The metal rose on November 21 to $1,207.93, the highest since October 30, after China unexpectedly cut rates for the first time in two years, joining Japan and Europe in taking steps to spur growth.

Net purchases of 92.8 tons of the central banks in the third quarter of 2014 brought year-to-date net purchases to 335 tons, slightly higher than the same period of 2013 (324tons) , according to the World Gold Council.

Gold demand totaled 929 tons in the third quarter of 2014, which proved to be a generally subdued quarter for the gold market Central Banks added a further 92.8 tons to their coffers. Supply was down 7 percent in the third quarter, while the volume of recycled gold continuing to shrink.

Azerbaijan’s choice

Azerbaijan should not succumb to trends and follow the example of those countries that have a policy at the expense of "soft" currency, a member of the parliament said.

"I think this is the right policy, because the exchange rate may rise or fall, these processes occur constantly," Ali Masimli, a member of the parliamentary committee on economic policy, noted. "Azerbaijan has certain limits, according to which part of the foreign exchange reserves are directed to the purchase of gold."

Currently Azerbaijan's gold reserves hit 30 tons, which comprise a 6.1 percent share in total foreign reserves. Azerbaijan's gold reserves were at the level of 10,273 tons in 2011, 11,277 tons in 2012 and 15,176 tons in 2013.

Masimli said Russia is actively reviewing the composition of its reserves and actively buying gold. Under the current circumstances, Russia simply does not know what to do in order to remove dependence on USD.

"It is wrong to simply abandon the dollar peg, such a step can only harm Russia’s economy and nothing else," he said.

Masimli noted that Russia wants to transfer payments on foreign trade operations with other countries in the ruble. "It can give the effect of the supply of goods in small volumes, but it does not give the same effect, for example, with products such as oil, which is supplied in large volumes," he said.

Russia plans to leave the “dollar dictatorship” of the oil-oriented market and turn to the country’s national currency and the Chinese yuan, Russian President Vladimir Putin said last week.

“We are leaving the dictatorship of the market where oil goods are based on the dollar. We want to increase the possibilities of using [other] national currencies: the ruble and the yuan,” Putin said in an interview with the Russian state news agency TASS.

Expert Ilaha Mammadli meanwhile noted that Azerbaijan has a unique economic model which allows it to enter the list of top dynamic growing countries of the world. “That’s why it’s difficult to predict what steps the government will take under these circumstances. In any case I think there is no need to increase the gold reserves," she told AzerNews.

Azerbaijan, whose economy is oil-export-oriented, gives priority to foreign exchange reserves rather than gold reserves.

International economic institutions confirm that Azerbaijan’s large foreign exchange reserves provide the authorities with chances to overcome possible risks.

The country with $54 billion foreign exchange reserves is committed to diversification. The country keeps the reserves mainly in USD as it receives energy revenues in USD, and in euros. The Central Bank of Azerbaijan, whose strategic currency reserves form the country's strategic assets, has recently announced that some $500 million will be invested in the Chinese market directly and more $500 million in other Asian markets. Thus, the CBA aims to diversify its financial tools and the geographic structure of reserves in current global economic environment.

Mammadli further noted that given the changes in the gold market, it’s better to sell gold rather than to buy it. “But there is no need to sell the state reserves as the country has also gold mines, although not in big volumes.”

She continued saying that surely the government does not see any necessity in purchasing the gold as the current gold reserves of SOFAZ doesn’t reach the five percent limit set for keeping the assets in gold. The country, namely the fund, possesses enough resources to bring the volume up, but doesn’t see any need for it.

Local market

Currently the inflation dropped to its minimum in the world market, the stock prices show rising trend and USD is strengthening. "All these reduce the attractiveness of investing in gold," said Vugar Bayramov, Chairman of the Center for Economic and Social Development.

“Countries such as India and China, which turned part of the reserves into gold in 2008-2009, have now begun to sell it which in turn will increase supply. On the other hand, we can observe speculations on the markets which lead to price changes,” he told AzerNews.

Bayramov said the gold prices also affect Azerbaijan’s state reserves as falling prices cheapens the reserves.

“SOFAZ bought 15 tons of gold in 2012 and a year later doubled the figure. The gold reserves of the Central Bank of Azerbaijan reached one ton. The state oil fund doesn’t provide the price and data of the gold purchase and that is why it’s difficult to say how much ounce costs for Azerbaijan. In any case, the falling prices give us ground to say that SOFAZ suffered from the gold purchase in past year,” he said.

Speaking about the local market, Bayramov said the prices for this precious metal fell by 5 percent in the past year.

“Gold seemed alluring for people as an investment tool, but now it loses its attractiveness as the purchase and sale prices sharply differ. If in the past, people, mainly woman, preferred expensive and heavy jewelry, today they prefer lighter ones. Market recession will continue until the end of this year. We don’t expect any rise in the price of gold, given that wedding and festive season has been suspended in the country with the start of month of Muharram,” he said.

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