The National Bank of Ukraine sells gold from its reserves for the first time in 10 years

In May the NBU began selling gold from its official reserves for the first time since 2004. Over the last month of spring it sold 2.8 t (90,000 troy ounces) of the precious metal to the tune of approximately US $113 mn, according to the regulator. As a result, the volume of the precious metal in the bank’s reserves decreased by 40.12 t.

The last time the NBU sold its gold reserves was in August 2004. Its official gold reserves fell by around 4 t (130,000 troy ounces) in that period, which at the time was the equivalent of US $50 mn. Since then the central bank has been increasing its gold reserves. Over the decade since July 2004 approximately 20 t of gold were accumulated in the NBU reserves.

Not as an investor

At first glance, the NBU had no reason to sell gold. First of all, Head of Local Fixed Income Department at Concorde Capital Yuriy Tovstenko said the peak indicators of the gold value that would make it sensible to sell the precious metal were not observed in May.

Quite on the contrary, the price of gold reached its peak on March 14 (US $1,385 per troy ounce) and then plummeted. From the beginning of April and practically throughout all of May it remained at the same level. Only in the last week of May the price fell by 3% to US $1,250.50 per troy ounce. As a result of the NBU selling its gold and decrease of the gold prices, its volume in reserves fell over one month in the money equivalent by US $158.9 mn and its share fell from 12.5% to 9%.
The decline in gold prices, however, was temporary. As experts of international investment companies and banks explain, the decline in the prices of gold in May and June was limited by geopolitical risks associated with the situations in Iraq and Ukraine. Moreover, the Russian-Ukrainian conflict and the threat of stricter sanctions imposed by the West against Russia continue to heat up the demand of the Bank of Russia for gold as “an insurance asset”.

According to data of the World Gold Council, in April alone the Central Bank of Russia acquired 27.7 t of the precious metal. For comparison, over the entire past year it purchased 77.5 t. On the other hand, there is no sense in hoping for a considerable rise in the price of gold as the weakening of demand in China and the slowdown in the economic growth in the U.S. are posing an obstacle to this. Precisely for this reason, prices are fluctuating on both sides around US $1,290 per troy ounce.

However, Director of the Department of Price Risks on Commodities and Currency Markets of SP Advisors Oleksiy Yeremin says it is most likely that the NBU approached the sale of gold not as an investor. “The national bank did not start selling gold in expectation of a decline in its prices as it most likely turned down the precious metal as an investment asset,” said the financial expert.

In search of cash

The most probable scenario is that the national bank desperately needed hard currency cash liquidity, which is the reason it decided to sell gold, Yeremin assumed. This happened despite the fact that May was a fruitful month for the NBU from the vantage point of filling its currency reserves. Within a month the reserves grew 25.8% to US $17.9 bn thanks to the financial aid received from international financial organizations and Western countries.

As NBU Governor at the time Stepan Kubiv said earlier, the gold and forex reserves would be replenished by US $3.2 bn thanks to funds from the first tranche of the IMF loan, by US $1 bn from the placement of Eurobonds under guarantee of the U.S. government, by US $888 mn from the World Bank and by US $255 mn from the placement of T-bills nominated in foreign currency. This considerably exceeded the sum needed for the payouts for the government debt, for the sake of which the NBU could have begun reformatting its gold reserves. However, Yeremin presumes that by increasing the volume of cash currency at its disposal, the NBU could also be preparing for possible payments of the gas debt to Russia, an issue that was discussed in May-June and was one of the requirements of the IMF.

As a reminder, on May 30 Naftogas Ukrainy transferred US $786 mn to Gazprom as repayment of part of its debt. Minister of Energy of Russia Aleksandr Novak specified: the Ukrainian company transferred gas payments for February and March, while its debt for the delivery of gas as of April 1, 2014 amounted to US $2.237 bn, which means that at the end of May debts for November-December had not been paid.