What Investors Can Learn from Russia’s Gold Reserve Drawdown

You might have seen in the news that Russia sold about 6.2 tons of its gold reserves in September. This, according to credible reports, is the 10^th straight month that Moscow has sold some of its bullion reserves. As an investor, what does this tell you?

First, we need to understand that gold is held in reserve by central banks so that they can have an asset they can sell when all else fails. This is the reason why central banks buy and hold gold for a long time, because it is a reserve that can only be dipped into when all other options have been exhausted.

In Russia’s case, its reserves of foreign currency were frozen back in 2022 when it invaded Ukraine. The country can’t access those reserves yet it needs money to fund its war effort and meet its other obligations within the country. Russia usually earns lots of money from natural gas and oil exports, but the revenue from these commodities has gone down partly due to sanctions placed on major exports from the country.

In such a situation, it is only natural that Moscow converts some of its gold reserves into cash so that it can fund its different programs, including the Ukraine war. With a ballooning fiscal deficit, it isn’t surprising that the country is resorting to selling gold in order to ease some of those financial pressures. Gold reserves exist for exactly those kinds of situations.

So, what does this tell you as an investor? Gold doesn’t earn interest, but it is wise to include it in your investment portfolio. The precious metal helps to shield your portfolio from total collapse in case things go awry with the other investments you made. If the price of gold appreciates while you hold it, that is a bonus benefit and those gains should never be the primary reason why you buy the metal.

Right now, there is debate as to whether AI stocks are in a bubble that could burst at some point. No one knows for sure whether the talk of a bubble is justified or simply alarmist. Other sectors also have their own weaknesses and individual stocks can tank without prior warning.

For example, a company can get sanctioned and its market valuation collapses. Assets can be seized by authorities like governments or even tax authorities. If that happened, your investment in the affected companies could become worthless.

Gold is relatively safe from such risks, especially if you own physical gold stored in a vault at a safe location. Such gold is free from counterparty risk, and you can count on it when all else goes south.

This is the reason why every experienced investor includes gold in their portfolio as a hedge for all their other investments. Hold it for the long term, and only add to or reduce it depending on what percentage of your portfolio you want this precious metal to hold. Avoid looking at gold as something you hold speculatively, because you would be missing out on its core role in an investment portfolio.

Russia’s case illustrates how important gold reserves can be for a country, and the same logic holds for an individual investor. After giving the discussion above serious thought, I guess you will now start looking at precious metals developers like Platinum Group Metals Ltd. (NYSE American: PLG) (TSX: PTM) in a new light.

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