Why is Putin Stockpiling Gold?

I can’t imagine it means anything cheerful that Vladimir Putin, the
Russian czar, is stockpiling gold as fast as he can get his hands on it.

According to the World Gold Council, Russia
has more than doubled its gold reserves in the past five years. Putin
has taken advantage of the financial crisis to build the world’s
fifth-biggest gold pile in a handful of years, and is buying about half a
billion dollars’ worth every month.

It emerged last month that financial gurus George Soros and John Paulson had also increased their bullion exposure, but it’s Putin that’s really caught my eye.
No one else in the world plays global power
politics as ruthlessly as Russia’s chilling strongman, the man who
effectively stole a Super Bowl ring from Bob Kraft, the owner of the New
England Patriots, when they met in Russia some years ago.

Putin’s moves may matter to your finances, because there are two ways to look at gold.
On the one hand, it’s an investment that by
most modern standards seems to make no sense. It generates no cash flow
and serves no practical purpose. Warren Buffett has pointed out that we
dig it out of one hole in the ground only to stick it in another, and
anyone watching this from Mars would be very confused.

You can forget claims that it’s “real”
money. There’s no such thing. Money is just an accounting device, a way
of keeping track of how much each of us produces and consumes. Gold is a
shiny and somewhat tacky looking metal that is malleable, durable and
heavy. A recent research paper by Duke University’s Campbell Harvey and
co-author Claude Erb raised serious questions about most of the
arguments in favor of gold as an investment.

But there’s another way to look at gold: As the most liquid reserve in times of turmoil, or worse.
The big story of our era is not that the
Spanish government is broke, nor is it that Paul Ryan apparently feels
the need to embellish his running record. It’s that the United States,
which has dominated the world’s economy for several lifetimes, is in
relative decline.
As was first reported here in April of last
year, according to International Monetary Fund calculations, the U.S.
is on track to lose its status as the world’s biggest economy—when
measured in real, purchasing-power terms—to China by 2017.

We will soon be the first people in two
hundred years to live in a world not dominated by either Pax Americana
or Pax Britannica. This sort of changing of the guard has never been
peaceful. The declines of the Spanish, French and British empires were
all accompanied by conflict. The decline of British hegemony was a
leading cause of the First and Second World Wars.

What will happen as the U.S. loses its pre-eminence?
Maybe this will turn out better than
similar episodes in the past. Maybe the Chinese will embrace an open
society and the rule of law. If you believe that, there is probably no
reason to hold any gold.
On the other hand, we may be about to enter
a much more turbulent and dangerous era of power politics and
international competition.

Not long ago, world gold reserves were
mainly in the hands of the U.S. and the Europeans, which accumulated
their holdings during their centuries at the top. The U.S. has 75% of
its currency reserves in gold. Many other first world powers have
comparable proportions.

But that’s beginning to change. According
to the World Gold Council, China, Saudi Arabia and Russia are now in the
top five. Western European countries have been selling gold. If the
current financial crisis gets any worse, they may yet sell more.

Emerging markets have been buying. In most
cases, gold remains a very small percentage of their total reserves.
China, despite its recent buying, holds less than 2% of its currency
reserves in gold.
But you have to wonder how long emerging
countries will want to hold their reserves in any currency that is
controlled by someone else. Vladimir Putin clearly doesn’t want to. Gold
now accounts for 9% of Russia’s reserves, and that figure is rising.

The gold price has had a shakeout since
peaking at around $1,900 an ounce a year ago. It fell as low as $1,566
in June. Since then, it has risen to $1,688.

But that shakeout has been exaggerated by
the rally in the U.S. dollar over most of the past year. Put another
way: Priced in euros, gold is nearly back to its old high. It’s 1,343
euros per ounce, just shy of the 1,356 euro record set a year ago.

The most common means of buying gold is either in bullion
or through an exchange-traded bullion fund such as the SPDR Gold
Shares. And maybe that’s sensible. [It should be noted with ETFs you
get gold's price action, but you really don't "own" gold.]

Brett Arends
September 5, 2012
www.marketwatch.com