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Brien Lundin: Sanctioning Russia's gold reserves may boomerang against U.S.

Section: Daily Dispatches

By Brien Lundin
Gold Newsletter, Metairie, Louisiana
Thursday, March 25, 2022

Any U.S. sanctions on Russia's gold reserves would do little more than reveal the degree to which government bureaucrats don't understand gold. 

The beauty of gold, unlike currencies, is that it is an untrackable store of value that has no counterparty. 

 At least in smaller amounts, Russia could easily sell gold on the open market. In bulk quantities it could just as easily sell the gold to China with no record of the transactions. In fact, that would seem a very likely outlet, as China has demonstrated that it is an eager buyer of gold and has kept the size of its gold reserves a closely guarded secret.

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The result of sanctions against Russian gold reserves would be to alert the 36 countries that hold significant portions of their gold reserves in the vaults of the Federal Reserve Bank of New York that they should take their gold back as soon as possible. 

And that could create significant turmoil in the gold market, since the Fed has demonstrated difficulty in actually finding and transporting the gold it holds for other nations. The bank famously told Germany that it would take seven years to repatriate just a portion of that nation's holdings. It ended up taking only four years, but the episode raised serious doubts that all the claimed national gold reserves are actually at hand in the New York Fed's vaults.

So the United States should think twice before placing sanctions on Russia's gold reserves.

In the short term, it could depress the gold price if Russia is able to sell a significant portion of its reserves. If, for instance, Russia was able to make arrangements to sell a significant percentage of its gold to China (likely at a discount), that would depress China's gold buying for some time.

Longer term, when other nations start requesting their gold back from the New York Fed, it would send the U.S. scrambling to find gold to fill those requests, assuming that the gold wasn’t readily available in the Fed's vaults. This could create enormous new demand in the global gold market and be a big factor in driving the price higher.

In general, the global gold reserve "business" is based on the idea that the holdings are essentially immobile. There's a lot of evidence that much of this gold has been leased out to institutions over the past few decades, with those institutions then selling the gold into the market and paying minimal interest on the gold debt.  

So any call on those reserves would create massive short-covering all down the chain and send the gold price rising precipitously.

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