Central Asian country hoards gold as shield against trade war
What do you do when your two biggest trading partners are embroiled in economic standoffs with the United States? You buy as much gold as you possibly can.
At least that’s what Kyrgyzstan’s central bank is doing in a bid to protect itself from currency volatility in China and Russia. The central Asian country hopes to grow the share of gold in its US$2 billion international reserves to 50 per cent, from around 16 per cent now.
“The rules of the game are changing,” Kyrgyz central bank governor Tolkunbek Abdygulov, 42, said in an interview in the capital, Bishkek. “It doesn’t matter what currencies we have in our reserves; dollars, yuan or rubles all make us vulnerable.”
Kyrgyzstan is well placed to build up stockpiles because the precious metal is its biggest export. Since 2014, the central bank has had a policy of buying up about as much of the country’s gold as possible, Abdygulov said.
Kyrgyzstan’s biggest mine, the Kumtor mine, is owned and operated by Canada’s Centerra Gold, with production sold outside of the country. Total industrial output was $3.4 billion in 2017, according to central bank data.
Having watched the Kyrgyz currency slump to a record low in 2015 during Russia’s currency crisis and standoff with the West, the mountainous country of six million people isn’t risking its luck with a brewing trade war between the world’s two biggest economies. Kyrgyzstan is heavily reliant on China and Russia for imports, and in particular on Moscow for remittances from the army of migrant workers who go there in search of work.
The policy has put Kyrgyzstan’s gold holdings as a percentage of total reserves close to the level held by Russia, and above emerging-market economies such as India and Turkey, according to data from the World Gold Council. The U.S. and Germany have more than 70 per cent of their reserves in gold.
After surging during the past decade, bullion has been stuck in the doldrums for most of this year as the outlook for higher borrowing costs dimmed prospects for the metal, which doesn’t pay interest. The commodity was trading near a six-month low at one point last week as the escalating standoff between the world’s two biggest economies over trade tariffs strengthened the dollar.
The Kyrgyz central bank was one of the first of the post-Soviet republics to adopt its own currency, the som. It has outperformed most regional peers in 2018, improving over a per cent.
Abdygulov is aiming to switch to inflation targeting by the end of his seven-year term in 2024. Until then, the best he can do is to grow, or at least preserve, the nation’s international reserves.
“If we decide to sell gold, we can easily sell it and convert into the currency we need. Taking into consideration we mine a lot of gold in our country, it’s Godgiven that we should keep a large part of our reserves in gold.”