The time has come for gold as central banks look to top up reserves

Gold bulls believe the time has finally come for the precious metal as central banks look to boost the holdings. Picture: David Gray/ AFP

Global gold bulls now believe their time has come, thanks to Vladimir Putin.

And the rise of gold comes as Australia is now challenging China as the world’s largest gold producer thanks to the dramatic resurgence of Victoria’s Bendigo fields. But the gold joy contrasts with deep soul searching among many of the world’s central bankers.

The gold outlook and the central bank soul searching are closely linked.

As a result of strong exports, Russia has been building up its foreign exchange reserves and prior to the Ukraine invasion they exceeded $US630bn – Russia saw that as a buffer against sanctions.

While Russia looks to have around $US130bn in Chinese bonds, the US/Europe transatlantic alliance has shut off the Russian central bank’s access to its biggest slab of foreign reserves. Years of savings were there one day and gone the next. There have been previous smaller attacks on central bank reserves of a country but nothing on this scale.

Most central banks will now be examining their reserve holdings which in total only comprise around 13 per cent in gold which can be insulated from the actions of other countries.

Given the Russian precedent, 13 per cent looks far too low for many countries and their central banks look set to lift their gold holdings, particularly as bitcoin, which was seen as a rival to gold, has been declining.

The anticipation of central bank buying helped push the yellow metal closer to $US2000 an ounce over the weekend. The gold rally was achieved despite the better than expected US jobs data confirming that an interest rate rise is long overdue. Normally the prospect of higher rates would subdue gold.

And the Aussie battler – our dollar – also performed well. Overall, Australia will suffer from a fall in world growth in the wake of the Russian invasion but, as I pointed out last week, our currency could advance further because, as well as gold and wheat price rises, developments in the oil and gas sector look price bullish.

The European community’s horror at Russia’s brutal actions in Ukraine are causing a groundswell of opinion demanding Europe stop buying Russian gas – it’s simply immoral to buy anything Russian.

The US is also considering extending sanctions to Russian oil and gas. It has been very reluctant to impose an embargo on Russian oil and gas because of the impact on US petrol prices.

Europe will be hit hard because it relies on Russia for some 40 per cent if its gas but a large number of Europeans are now prepared to accept the pain. Already, Russian oil is selling at discount and last week Shell was blasted for buying Russian oil.

Potentially Australia is set to have an important role in the gas developments.

We now know that the Russian invasion of Ukraine was discussed between China’s President Xi Jinping and Putin just before the Winter Olympics and Xi offered to take Russian energy and wheat to offset any sanctions.

If Europeans ban Russian gas, then China may replace purchases of some Australian gas to help Russia. We need to be ready to supply Europe, which will require additional LNG terminals.

Meanwhile Russia is headed towards a desperate economic situation.

Soon the sanctions and the collapse of Ukrainian farm production will cause Russia to be short of food, clothing and appliances. It’s airlines will struggle to fly, already Russian bonds are selling at discount prices and the equity value of its corporations has slumped. Large losses are expected in European and global banks that trade with Russia. Accordingly Deutsche Bank shares fell 9 per cent over the weekend while Barclays and UBS were down 7 per cent.

Xi has been horrified by Putin’s handling of the invasion which has not only unified Europe but created a transatlantic alliance. But Xi is most unlikely to desert his friend Putin in his time of need.

Russia may become a Chinese economic satellite. By helping Russia, Xi will lose global reputation, but extending the Chinese economic empire from the Pacific to the Russian western border is a handy second prize.