Who is Oleg Mozhaiskov? A Russian spy? A defecting nuclear scientist? A gold-medal winning weightlifter? A gold-metal loving central banker?
Mr. Mozhaiskov is, in fact, a central banker - that rarest breed of central bankers that favors buying gold instead of selling it. Since this particular banker's affinity for gold is not a fleeting fancy, but the studied result of a thoughtful macro-economic analysis, this particular banker may urge his comrades at the Russian central bank to buy more of the stuff.
Meanwhile, central bankers in China and India have begun musing publicly about diversifying out of dollars. Presumably, any diversification out of dollars would include a diversification into gold. Is the ancient monetary metal, therefore, becoming the modern monetary metal? Oleg Mozhaiskov suspects so.
"Gold is predominantly a financial asset," he says, "not merely a precious metal...the time has come to admit that investment demand was, and still is, the main driving force behind price fluctuations on the gold market. The changing character of demand heavily depends on what is going on in the international foreign currency and financial markets."
A few months back, at the Baltschug Kempinsky Hotel in Moscow, Mr. Mozhaikov addressed the London Bullion Market Association. "I would like to thank the conference organizers for this opportunity to share my thoughts on such a complex, even mythical subject as gold," Mozhaikov begins. "I assume that the request was made for one simple reason: that I, as a senior executive of the Bank of Russia, should know more than other ordinary mortals.
"In general, this logic is flawed," Mozhaikov jokes, as he launches into an articulate, reasoned examination of the gold market that reflects far more knowledge and insight than most mortals posses.
"What is gold currently, and what will it be tomorrow?" Mozhaikov wonders aloud. "Real money with intrinsic value? A raw material? A cash commodity that has lost some of its monetary functions? If so, what are the prospects - complete loss of gold's role or a restoration of lost functions, in one form or another...?
"There is a wide circle of leading financiers who...are convinced that the heads of the world's richest countries...have demonetized gold altogether. In their eyes, the existence of official gold reserves is simply a remnant of the past, a financial monument to the gold and gold-currency standards, which will ultimately be absorbed by the global gold market."
But the Russian central banker takes issue with this conventional "wisdom."
"The modern monetary system, although undoubtedly robust and long-standing, in fact has a number of flaws and weaknesses," Mozhaikov asserts, as he issues a scathing indictment of American monetary and fiscal profligacy. "Although there are several reserve currencies, the blatant lack of discipline is demonstrated by the U.S. dollar. I am leaving aside the main aspects of this problem, such as the social and economic injustice of a world order that allows the richest country in the world to live in debt, undermining the vital interests of other countries and peoples. What is important for us today is another aspect, which is connected with the responsibility of the state issuing the reserve currency and for the international community preserving that currency's buying power.
"Given the actual behavior of the dollar on the forex markets," says Mozhaikov, "the problem could be more accurately termed the irresponsibility of the U.S. government in relation to the market valuation of its currency in international circulation. Today the net debt owed by the United States to the outside world (the so- called 'international investment position') is in the region of $3 trillion. To understand the scale of this figure, let me remind you that it exceeds the total official currency reserves in all the world's countries (including the United States itself). According to the International Monetary Fund statistics at last year-end, the world pool of foreign currency reserves totaled...about $2,800 billion. The volume of cash only ('greenback' banknotes) available outside the United States totals about $400 billion.
"The world has come to a paradoxical situation in which the creditor countries are more concerned with the fate of the dollar than the U.S. authorities themselves are. Thus," says Mozhaikov, "the evolution of the U.S. dollar's reserve role in recent years has given ground to some quite pessimistic forecasts, based on rational economic theory. No wonder that the number of people who have held assets in dollars and now wish to diversify them partly into gold - the traditional shelter from inflation and political adversity - is steadily growing."
The Russian central bank, itself, is a significant dollar holder and - if we are to trust Mozhaikov's remarks - is one of the significant dollar holders that may now "wish to diversify partly into gold." Russia, which defaulted on its foreign debt in 1998, has since become a model citizen. The country's $113 billion of foreign exchange reserves would rank it seventh on the list of the world's largest central bank reserves. Yet its gold reserves total a mere 500 tones - or $7.8 billion dollars worth. In other words, gold represents less than 7% of its total reserves.
Meanwhile, the People's Bank of China holds about the same amount of gold as its Cold War ally, despite holding four times the foreign exchange reserves. As the nearby charts illustrate, China's gold reserve represents less than 2% of its massive $474 billion foreign exchange reserve. By comparison, many European central banks hold more than 30% of their reserves in gold, even after unloading much of it in recent years.
