Analyst Osadchy assessed the advantages and risks of the rush demand for gold among the population

— Why, despite the decline in gold prices on the world market, can it become a substitute for savings in dollars and euros for our citizens?

— The state continues to delight Russians with innovations in the gold market: immediately after the start of the special operation, from March 1, 2022, VAT on the purchase of gold bars for individuals was abolished. This spurred the already rushing demand of the population for gold. And from October 1, 2023, flexible duties on exports, including gold, will be introduced. The government statement said that the measure is temporary and aimed at protecting the domestic market. The duty will be from 4% to 7% depending on the exchange rate of the national currency, and at an exchange rate of 80 rubles per dollar and below it will be zero. At an exchange rate above 95 rubles per dollar, the duty will be maximum – 7%. “Ideally,” the price of gold on the domestic market may be lower than the world price by just the amount of the duty. True, this effect will be weakened by gold smuggling, which will become incredibly profitable – after all, with each “walk” the smuggler will receive this difference!

— Why did the Cabinet of Ministers introduce this measure?

— The duty is needed in order to “patch up” a huge hole in the budget – 2.4 trillion rubles for 8 months of 2023. However, this measure also affects the domestic market. The introduction of this duty may contribute to an increase in demand for gold from the population. And this demand is already high, because gold remains the main “safe haven” for capital in the turbulent waters of the Russian financial market.

One of the largest Russian banks reported that since the start of sales of investment gold in March 2022, it has sold gold bars with a total weight of 48.2 tons. The average transaction size reached 16 kg. A client comes from the bank, carries 16 kg of gold in a string bag, flexes his muscles.

— Usually, interest in gold grows in difficult economic times. Does everything fit here?

— Indeed, the growth in demand for gold is spurred by the fact that alternative investments are losing their attractiveness. Ruble deposits are being eaten up by inflation and devaluation. Foreign currency deposits in Russian banks are unwise due to restrictions imposed by the regulator. Let me remind you that funds from a foreign currency deposit can only be received in rubles at the bank’s internal (read: arbitrary) exchange rate. Deposits in foreign banks are increasingly dangerous for Russians due to the growing wave of sanctions. Our compatriots have become unwanted clients for banks from many countries. Investments in real estate are becoming increasingly risky due to the rapidly inflating “bubble” of preferential mortgages. We won’t even mention the promotions.

— So what should citizens do in such conditions?

— It turns out that the best option is to buy gold. Or platinum and palladium. To paraphrase Nekrasov, the “golden” time is coming, “when a man takes not a dollar, but gold and platinum from the bank.” True, the majority of Russians choose the most reliable investment – in our national currency, that is, they actively open deposits in banks.

Some desperate heads even propose tying the ruble to gold, reminiscent of the experience of introducing the Soviet chervonets. Indeed, the chervonets helped quickly stabilize the money market, but the chervonets soon had to be abandoned, since this innovation devastated the country’s gold and foreign exchange reserves. The authors of this innovation could have been put to waste, but 1937 was still far away; those were vegetarian times.

– Let’s go back to the present time. How have the events of the last year and a half affected Russian gold?

— Before the special operation, the main destination for Russian gold exports was London. Now, due to sanctions, the main flow goes to the Emirates. Second place is shared by Türkiye and China, which receives Russian gold through Hong Kong.

— It is these countries that determine the cost of the precious metal on the international market?

— Gold prices are supported by China, which is actively increasing its gold reserves. The main reason: the desire to replace American debt in the context of the conflict between China and the United States over Taiwan. Well, the example of freezing Russian assets in the US and EU countries also whips up the Chinese appetite for gold. As of September 1, 2023, the volume of Chinese gold reserves reached 2.2 thousand tons, having increased by 218 tons in July. For comparison: the gold reserves of the Russian Federation as of August 1, 2023 amounted to 2.3 thousand tons.

— Russia has more gold than China. Is our country somehow increasing its gold reserves?

– No. In 2023, the Russian gold reserve remained almost unchanged. The Central Bank of the Russian Federation buys tens of tons of gold from the Ministry of Finance from the National Welfare Fund, and the volume of gold reserves in Russia’s international reserves miraculously does not change. Over the 8 months of 2023, the Ministry of Finance sold 46.6 tons of gold to the Bank of Russia. It turns out that gold is being “shifted” from one pocket of the state (the Ministry of Finance) to another pocket (the Central Bank). At the same time, the gold physically remains in the same place and does not leave the vaults of the Bank of Russia. In particular, through such operations the budget deficit is covered and money is issued.

– Tricky move. Should Russians pay the same attention to the precious metal that regulators pay to it?

— The day after the abolition of VAT on gold, March 2, 2022, Russian Finance Minister Anton Siluanov said that given the unstable geopolitical situation, investing in gold would be an ideal alternative to buying dollars. According to the minister, the American currency is more volatile and is subject to various risks, which is why it cannot compete with precious metals.

— And yet the popularity of dollars and euros among Russians has not yet been overcome by gold?

— Yes, the population is stocked up with foreign currency in cash – alas, it is primarily toxic, despite the words of the minister. Thus, as of August 1, the population’s cash currency reserves increased from February 1, 2022 by $11.7 billion and amounted to $96 billion. It turns out that the “average” Russian has $700 “under his pillow.” However, wealthy and financially literate people understand the need to diversify their savings, as well as hedge them, that is, insure against the risks of inflation and “black swans”, and, accordingly, actively buy physical gold.

– But this type of savings also has its drawbacks…

– And there are spots in the sun. Firstly, the liquidity of gold is relatively low; you can’t go to a store or market with gold coins and bars. Secondly, low liquidity goes hand in hand with high spreads (the difference between the purchase and sale prices – “MK”): the bank that sold you the gold bar will buy it from you much cheaper, spreads can exceed 10%. Thirdly, the price of gold is subject to significant fluctuations. In addition, when buying gold “from hand”, you can run into a fake. “Physical” gold does not generate interest income. Finally, storing and transporting gold involves risks and costs.

— Do sanctions threaten Russian gold? Currently, the G7 countries and the EU are discussing the 12th package of restrictions, which, according to rumors, will include restrictions on Russian diamonds. Could, for example, they also introduce restrictions on the export of our gold?

— Although the gold bar bears an assay mark, indicating, in particular, the country of origin, gold is easy to melt down, so sanctions are unlikely to significantly affect the export of Russian gold. And in order not to bother, you can immediately put the “correct” stamp. Let us remember the story of a hundred years ago: the capitalists did not like the communist symbols on Soviet gold coins, so the communists, discarding ideological prejudices, minted chervonets in the old regime surroundings – with crowns and double-headed eagles.

– Let’s summarize our conversation. Can you advise citizens to invest in gold, despite the risks?

— Yes, this precious metal is a useful investment tool, but it should not be abused, taking into account storage costs and relatively low liquidity. It is generally recommended to keep about 5% of your portfolio in gold. If you are a non-professional player in the gold market, then you should not react to momentary conditions; it is better to invest in gold for a long period. Gold is not paper or a number; it will not deceive. Unless, of course, some revolution occurs in gold mining technology that dramatically reduces costs.