The war in the Middle East triggered a gold rush
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The fever in the global gold market, which began after the West’s unprecedented freezing of the gold and foreign exchange reserves of the Central Bank of the Russian Federation, was fueled with renewed vigor by the conflict in the Middle East. At the end of October, the cost of a troy ounce increased on exchanges by 8% and for the first time since May exceeded $2,000. MK found out how long the “banquet” will last and with the help of what “golden” instruments private investors can earn income.
The excitement in the global gold market began in the spring of last year, when the West blocked the gold and foreign exchange reserves of the Central Bank of the Russian Federation in the amount of $300 billion. Many analysts regarded these actions as theft. The shock predictably returned interest in classic defensive assets. Central banks of developing countries began to buy gold bars en masse. Since the middle of last year, global regulators have purchased 1,081 tons. Private investors have tried to keep up with the regulators. For example, in Russia, according to the Ministry of Finance, in 2022 citizens increased investments in gold by 15 times and bought more than 75 tons of bars.
Historically, when US bond yields rise, gold prices fall. However, since the middle of last year, gold has been resistant to rising US bond yields. Moreover, the yield on such securities at the moment exceeded 5%, which was a record since 2007, to which gold prices did not react in any way.
This year, interest in gold has only intensified. According to a report by the World Gold Council, in the nine months of this year, central banks purchased another 800 tons of the precious metal, 14% more than a year earlier. In the third quarter, China, Poland and Türkiye were the most active buyers of bullion.
In Russia, in addition to global factors, the demand for gold bars was increased by accelerating inflation and the sharp weakening of the ruble in August. Against this background, new exchange-traded gold funds have emerged.
The conflict in the Middle East has once again driven up gold prices. Since the beginning of the year, the precious metal has been outperforming the S&P 500 index in terms of profitability. In October 2023, the Moscow Exchange set a historical record in precious metals trading volumes worth RUB 64 billion.
Today in the Russian Federation, private investors have several options to invest money in gold: bullion; anonymized metro accounts (OMS); investment and commemorative coins; mutual investment funds (MUIFs) linked to the gold index; shares of gold mining companies; exchange futures for precious metals; bonds and shares of pawnshops whose securities are backed by gold. The choice depends on the client’s risk profile.
As Alexander Potavin, an analyst at Finam Financial Group, believes, buying gold bullion is definitely not suitable for speculation. Since there is more and more money in the world every year, gold can be tried as a protective instrument against inflation. Investments in gold bars, in his opinion, can be used as a measure to diversify savings across different asset classes only for the long term. “For short- and medium-term transactions with gold, it is better to pay attention to shares of gold mining companies and GLD/RUB (gold for rubles) contracts, which receive additional benefits in a situation where the ruble exchange rate is weakening,” the expert emphasized.
“In our strategy for November, we prefer to place up to 20% of the portfolio in gold through perpetual futures on the Moscow Exchange,” Digital Broker analyst Daniil Bolotskikh told MK.
According to Alfa Capital analyst Alexander Dzhioev, the simplest and most understandable way for a Russian investor to take exposure to gold is to purchase shares of the BPIF. Exchange-traded funds follow a gold benchmark, so the value of their shares directly reflects the price of gold. At the same time, the investor does not need to worry about where the gold is stored. An additional advantage of BPIFs is their high liquidity. “As for the shares of gold mining companies and pawn shops, there is no complete positive correlation between the price of shares and the price of gold. For example, the ETF fund for American gold mining companies GDXJ has fallen by 8.6% since the beginning of the year, while the price of gold has increased by 8%,” the specialist added.
According to Freedom Finance Global analyst Vladimir Chernov, a private investor should divide shares of the portfolio into fixed income assets (bonds of gold mining companies, compulsory medical insurance on demand, physical bullion) and invest a small share of approximately 10–20% in risky assets (shares of gold miners) . Among the risky assets, he singled out Polyus Gold, since the demand for sales of its precious metal is provided by the state.
Bolotskikh agrees with the choice of the favorite in the sector, recalling that this gold mining company has one of the lowest levels of costs for extracting precious metals in the world and recently carried out a procedure for repurchasing shares that can be used for M&A transactions.
“Gold is a savings instrument; purchasing an asset potentially allows you to make money on changes in its price,” said Timur Nigmatullin, senior investment consultant at Finam Financial Group. According to his assessment, from a tax point of view, gold bars are most profitable due to VAT not included in the price of the metal. However, it is important to remember that gold is considered property under the law. If the owner of the bullion sells it to the bank, then on the income received in rubles he is obliged to pay personal income tax – 13%.
According to Vladimir Chernov, in the near future the price of gold will primarily depend on the geopolitical situation. With the intensification of the conflict in the Middle East and the involvement of other states in it, world gold prices are capable of renewing historical highs and rising to $2,100 per troy ounce.
Daniil Bolotskikh is confident that in addition to geopolitics, quotes will also be influenced by the actions of central banks and global inflation. He does not expect a strong increase in gold prices in the fourth quarter and by the end of the year predicts trading around current levels: $1,900–2,000 per troy ounce.
Alexander Potavin expects gold prices to recover next year as the US Federal Reserve starts cutting interest rates. The investment attractiveness of gold may also increase in the event of a recession in the United States. “In this case, interest rates will begin to fall, stock markets will go down, and the demand for gold will rise as a protective asset,” the expert explained. He believes that metal quotes may reach the area of strong annual resistance at $2080 per ounce at the beginning of next year.
In the opinion of Alexander Dzhioev, in the current conditions of increased geopolitical tension and the slowdown of key world economies (China and the EU), diversification of investment portfolios is more relevant than ever. “In this regard, one should not neglect an asset such as gold. Gold may not pay income, but it can preserve savings. We expect that by the end of the year gold will trade in the range of $1,900–$2,100 per ounce,” the analyst concluded.
Newspaper headline:
Private investors are back for gold
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