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File photo of bars.

ARND WIEGMANN/Reuters

Bloomberg News is reporting that Russia is hungry for gold. That's just the sort of report gold enthusiasts love to hear, but you wouldn't know it from the price: Gold was down slightly in early trading on Monday, to $1,658 (U.S.) an ounce, off $9.

The reason this might come as a surprise is that Russia's embrace of gold is exactly what gold bulls have been arguing for years. According to Bloomberg (using data from the International Monetary Fund), Russia has become the world's biggest gold buyer over the past decade, adding 570 metric tonnes to its coffers, outpacing China.

Over this period, the price of gold has risen some 400 per cent, making Russia's leadership look astute. But apart from being a fine-performing investment, the embrace of gold feeds into many of the broader economic and financial issues that gold enthusiasts have long been pointing out.

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Bloomberg quotes Evgeny Federov, a lawmaker for Vladimir Putin's United Russia party: "The more gold a country has, the more sovereignty it will have if there's a cataclysm with the dollar, the euro, the pound or any other reserve currency."

Russia's gold purchases also fit in with the argument that the more central banks tinker with monetary policy – in particular, employing the strategy of quantitative easing to help drive down borrowing costs and stimulate economic activity – the more they need to diversify their assets, particularly central banks in developing economies. Gold is seen as an alternative to flakey currencies. That is why central banks have recently switched from being net sellers of gold to net buyers.

Marcus Grubb, the head of investment research at the World Gold Council, told Bloomberg News that this switch is significant and "obviously a very positive one for the gold market."

So why are gold prices ignoring such a bullish development?

Gold has been struggling since 2011, when it touched a high of $1,900 an ounce. Around that time, central banks were also touted as serious gold buyers. The Wall Street Journal reported on the World Gold Council's report on central bank buying with the headline: "Central banks catch gold fever."

But this enthusiastic reaction ignores a few things. First, Russian and Chinese gold buying has to be put into context: Their gold reserves aren't that huge. According to Bloomberg, Russia's total cache is 958 tonnes – good enough for a mere eighth-place ranking, or just an eighth of what the U.S. holds and about a third of what Germany holds.

And second, central bankers have never been seen as a good indicator of what investments are going to be hot: They were keen to sell gold at its low point a decade ago, so their embrace of gold today could easily be categorized as a contrarian indicator. Using the great fool theory of investing, central banks are the biggest fools.

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And lastly, markets are forward-looking – and what they see today isn't ongoing economic stimulus but rather an improving, if sluggish, global economy. In this environment, gold doesn't cut it.

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