The casual, weekend investor may be given pause by this paradox: While inflation in the West is still uncomfortably high, and the US economy is roaring, the spot price of gold continues its historic climb. Normally, as the world’s major economies would heat up, investors would cool on precious metals, as the latter doesn’t yield any interest or dividends, even though it can be relied upon to retain at least some significant value.
Gold, then, traditionally has been seen as a safe harbor in bearish bond and/or equity markets.Why, then, has the price of gold continued an historic rise over the past two years, reaching an all-time high of $2,790.07 per ounce in October, as the world’s largest economy, for one, has boomed at the same time? On March, 20, 2020, $1,488 would buy you an ounce of gold.
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At one point on Tuesday, the price sat at $2,675.As those dates might suggest, the Russian invasion of Ukraine is a good place to start digging and panning for answers.For one thing, investors usually flock to gold when geopolitical tensions are high, as certainly was the case when Russian President Vladimir Putin raised the specter of nuclear strikes last month.
“Clearly that has sparked safe-haven interest,” Peter Grant, vice president and senior metals strategist at Zaner Metals, told Reuters in late November.And then, there is the rush on gold from the Kremlin itself.
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‘A wake-up call for central banks worldwide’
Last month, the Russian Ministry of Finance announced that it would increase its daily currency and gold purchases by 35.5 percent. Moscow’s gold reserves had already surpassed the $200 billion mark in October for the first time, reaching a record $207.7 billion.
“Since 2022, gold prices have surged 40 percent even as US interest rates were climbing,” Lina Thomas, commodities strategist with Goldman Sachs Research, pointed out on the New York-based investment bank’s blog.
“That is very strange. Typically, higher interest rates make gold less attractive – because gold doesn’t pay any interest, unlike bonds.”After the US and other Western countries started freezing Russia’s central bank assets held in those countries’ financial institutions, that logic was upended.
“That was a wake-up call for central banks worldwide,” Thomas continued. “They began to diversify their reserves away from the dollar and into an asset no one can freeze – and that is gold.” Thomas forecasts that that gold will rise to $3,000 per troy ounce by the end of next year.
So, where does Russia get its gold?
In 2022, Russia was the second-largest producer of gold in the world, tied with Australia at 320 tons mined annually, or 10.3 percent of the world’s production. They ranked just behind China with 330 tons, or 10.6 percent of global share. (The US came in fourth place, behind Canada, with 5.5 percent, while South Africa, the world leader as recently as 2006, had slipped to seventh place that year, with 3.3 percent.)
The largest gold-mining companies in Russia, according to Statista figures from 2021, are: Polyus, one of the world’s largest with about 85 metric tons produced that year, followed by Polymetal International (35 metric tons) and then Kinross Gold, Petropavlovsk, Nord Gold, Uzuralzloto, and others. To get an idea of orders of magnitude, Polyus reported an operating profit of $1.58 billion in the first half of this year.
Those companies mostly sell their gold to Russian commercial banks, such as VTB Bank, MDM, Sberbank, and Gazprombank, the financial arm of the majority state-owned energy company, Gazprom.
They, in turn, sell the gold to the Russian central bank, the Bank of Russia, which owns and manages all of the country’s reserves. It stores two-thirds of its gold in Moscow, in a vault on Ulitsa Pravdy, and the rest in a building in St Petersburg.
A new “gold trade route”
One of the largest problems with the sanctions-laden Russian economy is that the ruble has been fizzling in value, and it has no legitimate access to dollars or euros.
According to US-based think thank, RAND, Russia seems to be “trading gold for hard currency, weapons, and foreign goods, creating a new gold trade route between Russia, Africa, the Middle East, and China,” its analysts wrote in September.
“By the time of Russia’s full-scale invasion of Ukraine in February 2022, it had been acquiring gold at a faster rate than any other country for a decade,” noted John Kennedy, a research leader in the field for RAND.
An executive order from the US president’s office (E.O. 14024) has been in effect since the beginning of Russia’s full-scale invasion, declaring that “persons determined to be responsible for or complicit in, or to have directly or indirectly engaged or attempted to engage in, deceptive or structured transactions or dealings to circumvent US sanctions, including through the use of assets such as gold or other precious metals” are subject to penalty.
Nonetheless, “Moscow is using gold to prop up its wartime economy and bolster access to crucial goods, while holding considerable influence over the production of gold in Central Asia and Africa,” Kennedy wrote.
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