The central bank of Russia has been an important gold buyer for many years and is therefore an important pillar for the gold price. However, the institution has now decided to suspend purchases until further notice. This decision should therefore also have an impact on the gold market.
• Russia’s central bank stops buying gold
• Russian economy unfortunately under corona consequences and the drop in oil prices
• What does this mean for the gold market?
Corona pandemic feeds growing gold demand
Since the corona virus has spread more and more in the world and has claimed an increasing number of victims in numerous countries, nothing has been the way it was. Economies isolate themselves and their citizens, the stock markets are highly volatile and the central banks are also taking drastic measures to support companies and governments. That in uncertain times a “safe haven” like gold is in high demand, no one should be surprised. But the pandemic is not leaving its mark on gold mines, mines and refineries either. Production is at a standstill in many places, gold that has already been mined and further processed is partly packed in boxes and is waiting for further transport – which to a large extent also came to a halt due to Corona.
Physical gold is becoming scarce
It is therefore not surprising that the yellow precious metal is currently difficult to get hold of in view of the high demand. Physical gold in the form of bars and coins in particular is in short supply. In this context, banks and online gold traders are forced to accept only a limited number of orders due to the increased order volume.
Russia hit twice
Russia is now feeling the consequences of the corona outbreak, a country that is not insignificant for the international gold market. The economic problems of the Russian Federation are not solely due to the spread of the new type of lung disease. The current drop in oil prices is also making the multinational state difficult. This, in turn, is due to a price war that recently broke out between Russia and OPEC member Saudi Arabia. Neither country agreed to cut oil production, a clear message that sent shock waves due to the impending oversupply by the oil market. In addition, international oil demand has already declined sharply due to the stagnating economies. However, since the Russian economy strongly oil is particularly hard hit. The Russian central bank informed only a few days ago that it expected economic activity to decline in the coming months.
No more gold purchases from Russia
But what should have surprised gold investors worldwide even more was the announcement by the central bank that it would stop buying gold on April 1. Russia has been the largest buyer of gold for years. The country draws its reserves from local, Russian sources. The Russian Federation has been buying gold every month for the past few years. According to figures from the World Gold Council, a total of 158.1 tons of gold were purchased by Russia last year. In January, the country increased its massive reserves by 8.1 tons. The multinational state has a total of 2,279.2 tonnes of the precious metal and is fifth in the world. As Forbes reports, it is estimated that Russia has so far cost this massive treasure around $ 40 billion. It will remain the same for now: “Further decisions regarding gold purchases will depend on the development of the situation,” the central bank said in a statement.
Consequences for the gold market
The decision should also be of great interest to the gold market. Because Russia is the largest buyer, the supply, in particular through gold, which was mined in Russian mines, is now increased. As ING chief economist Dmitry Dolgin told Bloomberg: “The central bank is now signaling gold sellers that they should redirect their supply externally. Global demand seems high.” The shortage, which led to violent surcharges in particular when purchasing physical gold, should be alleviated somewhat, which should also lower the gold price somewhat. The decision of the central bank, which was announced on March 30, immediately sent the gold price back below the $ 1,600 per troy ounce mark, around which the precious metal had been pending until then.
Will Russia Repel Gold?
The price of the precious metal would fall even more seriously if Russia decided to sell some of its reserves. As the past has shown, gold sales by a central bank can mean a rapid drop in the price of gold, as happened in the 1990s, for example, when the Bank of England sold 58 percent of its reserves, which was the price per troy ounce of $ 400 previously plummeted to $ 250. This event also led to the so-called Washington Agreement, which prohibited signing central banks from selling more than 400 tons of gold in one year and more than 2,000 tons in five years. The agreement, signed by numerous central banks in 1999, has been renewed five times since then, but ended in 2019.
Nevertheless, analysts currently believe it is unlikely that Russia could take this drastic step soon. Juan Carlos Artigas of the World Gold Council said in an interview with Kitco News that gold remains an attractive diversification option for central banks. The central banks could use gold reserves to support their currency, particularly in times of low interest rates. Nordea Bank analyst Nordea Bank commented on the move to Bloomberg as follows: “The central bank is unlikely to want to increase the gold portion of its reserve while the reserve size is falling.” Around 20 percent of the central bank’s international reserves are made up of gold, a very high proportion compared to other central banks, as Bloomberg estimates.
It remains to be seen what steps Russia will announce next.
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