The financial world has undergone some pretty dramatic changes over the past 20 years. And, by all indications, the next 20 years will most likely be just as turbulent, if not more so. For investors, the coming monetary upheavals will undoubtedly require an iron will and a deft hand to navigate successfully.
So what is a good practical way to safely negotiate the future financial tribulations that await us? I have an unusual suggestion: we should strive to invest like the Russian Gokhran.
Now I know what you’re wondering. Why is the Antique Sage off his medications again? And what in the world is the Russian Gokhran? While I can’t help you with the first question, I can certainly shed some light on the second one.
The Gokhran is a state investment fund run by the Russian Ministry of Finance that exclusively buys tangible assets like precious metals and gemstones. More specifically, it purchases institutional-sized amounts of gold, silver, platinum, diamonds, emeralds, rubies, sapphires, alexandrites, natural pearls and amber. It also purchases jewelry and objets d’art crafted from these precious materials. The Gokhran even holds many of the Czarist-era Russian Crown Jewels.
The Russian Gokhran’s hard asset approach to investing is unique among global central banks. Most central banks investments (which are usually funded by international trade surpluses) are funneled into U.S. dollar and euro denominated bonds. These foreign currency reserves are important because they project an image of financial strength to the international community. This helps deter speculative attacks against a country’s currency.
Some countries use a different kind of investment vehicle known as a sovereign wealth fund. Sovereign wealth funds are much less conservative than central bank foreign exchange reserves. They often invest heavily in international stocks, real estate, venture capital and private equity. This is meant to grow national wealth aggressively, unlike foreign exchange reserves which are meant to instill confidence in a country’s currency. Norway, China, Singapore and various Middle Eastern oil producers control some of the world’s largest sovereign wealth funds.
The Russian Gokhran, however, is neither a sovereign wealth fund nor a foreign currency reserve fund. Russia actually has both types of these other investment vehicles, but they are completely separate legal entities from the Gokhran.
And here is the interesting part. Nobody (except the Russians) knows the value of the assets in the Gokhran (although they are assuredly many billions of dollars, if not more) or even exactly what assets it holds!
So why is there so much secrecy surrounding this little-known Russian hard asset investment fund? In order to answer that question, we need to know a little bit about the history of Russia and the Gokhran.
The Russian Kammer Collegium was the original forerunner of the Gokhran. This predecessor institution was found in 1719 by Peter the Great and enjoyed great prestige, particularly during the 18th century when a series of jewelry-loving empresses sat on the Russian throne. According to legend, all valuables in the Kammer Collegium were securely held in a vault behind three different locks – each with its own unique key – which were split between three trusted senior ministers.
Even after the fall of Czarist Russia in the early 20th century and the establishment of the Soviet Union, the idea of a state repository of tangible assets persisted. As a result, the Soviets created the Gokhran in 1920 and decreed that all existing assets inherited from the Czarist crown should be held in trust for the Soviet people.
This was especially important starting in the 1950s, when large diamond deposits were discovered in Siberia. The Soviet Gokhran ended up purchasing many of these Siberian diamonds in subsequent decades, including the largest rough diamond ever found in the Siberian Mir mine.
Today’s incarnation of the Gokhran was formed in 1996, a few years after the fall of the Soviet Union. But even though its official name may have changed many times through the centuries, the Gokhran’s mission remained the same: buy and hold high value tangible assets for the benefit of the Russian people.
Basically, the Russian government has a tradition of maintaining wealth in a portable physical form. And it is a good thing too. Russia’s history over the 20th century has been particularly tumultuous. Institutions (or people) that saved in Russian paper money or financial assets tended to do poorly. The Gokhran was a natural and successful strategy to preserve wealth in such an uncertain world.
It isn’t a great intellectual leap to apply the same logic to our financial situation in the West today. We face a precarious future, where many solemn financial promises will be broken, if for no other reason than that they cannot possibly all be kept. And while you and I might not be able to afford to build a billion-dollar fund like the Gokhran, we can certainly create our own miniature versions.
As an aside, if our central bankers were really smart, they would be buying hard assets hand over fist in preparation for our inevitable economic unhinging. For example, a great addition to any central bank’s vault would be the 910 carat gem quality rough diamond that was recently pulled from the Letseng mine in Lesotho, Africa. This absolutely colorless, nearly flawless diamond is substantially larger than a golf ball and has an estimated auction value of $40 million. Even though it is the 5th largest gem quality diamond ever found, it would still be easily affordable for many of the world’s central banks.
This unnamed 910 carat diamond would look great in the U.S. National Gem Collection at the Smithsonian Institute, sitting alongside other illustrious gemstones like the Hope Diamond and the Hooker Emerald. Its purchase would be a boon to U.S. citizens. Unfortunately, I have little hope that U.S. government officials will take me up on my advice. They would have to invest like the Russians do, and I find that highly unlikely in today’s politically-charged climate.
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