Interview with Managing Director of Sber Private Banking Andrey Shenk about the demand for gold

In early April, the price of gold on the world market for the first time in history exceeded $2,300 per troy ounce, having increased by almost 13% since the beginning of spring. The ruble price increased even more, by more than 15%, and consolidated in the range of 6800–6900 rubles/year. Quotations on the Russian market were higher only in the first ten days of March 2022. The managing director of Sber (MOEX: SBER) Private Banking Andrey Shenk.

— From January to February, quotes were in a narrow corridor of $2000–2100 per ounce. Why did prices start to rise since the beginning of spring?

— The renewal of the historical maximum in the dollar price of gold was facilitated by investors’ expectations regarding the US Federal Reserve’s imminent transition to easing monetary policy, on the one hand, and significant purchases of gold by major central banks, on the other.

The monetary factor has historically played an important role in determining the price of gold. For example, in February, against the background of inflation data in the United States, which accelerated to 3.2% in annual terms, as well as strong data from the labor market, gold quotes were under selling pressure and fell below $2,000 per ounce. In March, inflation expectations stabilized, and most experts expect the dollar rate to decline in the second half of 2024, albeit at a slower pace; in response, quotes returned to growth. The reason for this dependence is that the level of the US Federal Reserve key rate, like the key rate of the Russian Central Bank, affects the yield of government bonds, which affects the attractiveness of gold, which does not bring coupon income.

The price of gold is driven up by strong demand for the metal from global central banks, as well as growing geopolitical tensions. According to the World Gold Council (WGC), in 2023, all world central banks bought a total of 1,037 tons of metal, which is slightly less than the record figure for 2022. This is comparable to the gold reserves of Switzerland, which is one of the ten largest central banks in terms of this indicator. Such high demand for the metal from central banks added about 10 percentage points to prices from last year’s entire 13% rise, WGC data shows.

This year the trend has continued. At the end of January, according to the WGC, world central banks bought almost three times more gold than in December 2023, namely over 45 tons. The main buyers are the central banks of developing countries, primarily China and Turkey. If previously such purchases were associated with the diversification of reserves, now the key reason is the increased toxicity of the dollar and euro after the freezing of part of the reserves of the Central Bank of Russia.

— Should we expect a further increase in the price of gold on the world market? What factors will determine price dynamics?

— In the current trend, we see a high speculative component: traders actively opened long positions in the precious metal in order to make money. Therefore, in the next few weeks we can expect profit taking, which will lead to a local correction. Especially if macroeconomic data from the United States is worse than expected, and the American financial regulator tightens its rhetoric. In such a scenario, gold prices could drop to $2,100 per troy ounce. But such a correction will be a good opportunity for long-term investors to increase their positions in the metal. Over the long term, key market participants see significant growth potential for gold prices. Lower rates in developed economies, the trend toward dedollarization and fragmentation of the global economy, demand from central banks, geopolitical challenges, including elections in the United States, as well as rising metal production costs create the groundwork for price growth over the next few years.

— A larger volume of metal than the world’s central banks was bought last year by private investors in the form of bars and coins. According to the World Gold Council, such investments increased by 1,190 tons over the year. According to the Ministry of Finance, in 2023, Russians bought more than 74 tons of metal. How do you assess demand this year?

— The rush demand for bullion that we saw in 2022 has gone away. At the end of 2023, our clients bought 16 tons of metal, which is 3 tons lower than the previous year, but this result is 15 times higher than the sales volume in pre-crisis 2021. A key factor in the growth of customer demand in 2022−2024 was the abolition of VAT on precious metals in bullion. Since the beginning of the year, clients have purchased more than 2 tons of gold in the form of bars. At the same time, in 2024 we are also seeing increased customer demand for investment coins, mainly from the traditional “St. George the Victorious” series. It is also a liquid asset that has been well known in the market for many years. The volume of investment coins has already exceeded 750 kg since the beginning of the year.

— Why do individuals continue to actively buy metal?

— Russians, especially wealthy ones, are accustomed to storing a significant part of their savings in foreign currency and foreign currency assets as a protection against the increased currency risks inherent in our economy. In addition to this, many of them often had families living abroad and had foreign assets, which required regular foreign exchange expenses. However, in 2022, due to expanded anti-Russian sanctions and blocking of foreign currency funds of Russian citizens, their confidence in the dollar and euro was shaken. Gold has become one of the alternatives to these currencies and the assets denominated in them – a safe asset that has been tested by time and crises, the storage of which is not subject to infrastructure risks. Subsequently, replacement bonds were added, as well as bonds denominated in yuan.

— What weight bars are purchased most often?

— Ingots from 1 g are available to customers, but the greatest demand is for bars weighing 1 kg (measured) and from 11 to 13 kg (standard). At Sberbank, they can not only purchase measured and standard bars of gold and silver at an individual rate (when purchasing from 3 kg for gold and 150 kg for silver), but also leave the metal for safekeeping in the bank. Not all major banks on the market offer this service. Moreover, you can place with us even bullion purchased from another bank, but only if you have a standard certificate.

We also offer other investment options in precious metals. For example, gold commemorative, exclusive (from 1 kg of gold) and investment coins, including the “St. George the Victorious” series of different nominal values. In addition, you can open an impersonal metal account through your personal account in SberBank Online or at a bank office. This is a convenient way to invest in precious metals without the need to store physical metal.

— What is the difference between responsible storage of bullion and renting a cell? Why pay for additional service if many of your clients already have rented cells?

— When storing ingots, the preservation of their appearance, as well as the certificates for them, is important. If you use the safekeeping service, these risks will be minimized, since the bank takes responsibility for the safety of the bullion. It is worth noting that storage standards were established by the Bank of Russia and banks cannot make them softer – only toughen them. If the bullion is stored in a safe deposit box, the bank does not guarantee the quality of preservation; you will take on these risks. We can only advise you to be careful when transporting gold. Since the metal is very soft, it is better to store it in an unopened factory capsule, and in case of depressurization, you should not touch it, wipe it, or even wash it.

— How much of your savings should be kept in gold?

— It all depends on risk appetite: the lower it is, the higher the share of investments in gold should be. On average I would allocate about 10% to it. It should be borne in mind that during periods of increased geopolitical and economic risks, such investments should increase, and in the event of a decrease in risks, on the contrary, they should decrease. But even if it seems to you that everything is calm, you should not reset your positions in gold, since some crisis phenomena develop so quickly that you may not have time to jump back into it.