Gold as an Alternative to Savings in Foreign Currency
Gold beckons people again like never before. Why? It’s very simple. “It is gold that guarantees the safety of funds during hostilities, high inflation and a general increase in uncertainty. Gold in its physical form is an ideal investment asset in the current environment,” Oksana Lukichyova, commodity market analyst at Otkrytie Investments, told Capital Ideas.
As expected, the abolition of taxes on the purchase of gold by individuals pushed the growth of the volume of its sales. What can be said about the nature and dynamics of the demand for gold bars and coins, based on the results of the first months of trading them?
In the first two months after the abolition of the VAT, March and April, gold sales rose sharply, amounting to 6.5 tons in the first quarter (data from the World Gold Council). The greatest demand was for ingots in the amount of 500–1000 grams. We can say that the accumulated deferred demand has now been fulfilled. Also, sales were spurred by the sharp weakening of the ruble and high geopolitical uncertainty in February–March 2022. Then the situation calmed down a little, and total sales in Russia fell to 5.5 tons in the 2nd quarter. For these six months, sales of coins and bars in the Russian Federation amounted to 12 tons, as against a total of 5.3 tons in 2021.
What are the goals and motivations of buyers? In the future, will gold be able to significantly replace other, more familiar ways of saving and protecting these funds from inflation?
We can say that there was a perfect storm that provoked purchases of precious metals, primarily gold. Buyers were primarily interested in the safety of funds in the long term. It is gold that guarantees the safety of funds during hostilities, high inflation and a general increase in uncertainty. Gold in its physical form is an ideal investment asset in the current environment. Further growth in sales will be facilitated by the de-dollarization of the Russian economy.
What are the advantages and disadvantages of physical gold in comparison with essentially similar banking products which are also tied to the market price of the precious metal?
As already mentioned, gold in the form of coins and bars guarantees the long-term safety of funds in conditions of high uncertainty. The only disadvantage of investing in physical metal is the need to ensure its safety, which entails costs. Any banking or exchange products tied to the value of the precious metal (so-called “paper gold”) cannot perform the function of preserving capital for a long period of time, because they are subject to systemic risks (i.e. depend on the activities of the bank or exchange that issued the instrument).
Can an individual take his gold abroad, if necessary?
This is possible if the value of the metal exported does not exceed 10,000 US dollars. Filing a declaration is mandatory.
Who else, besides direct participants, can benefit from the development of a gold trading system for the population?
Banks, stock exchanges, the Central Bank, the population itself, and the currency system of the Russian Federation as a whole all stand to benefit – because the financial stability of all participants in the gold market will increase.
How might the price of gold bullion be affected by the loss by Russian companies of LBMA Good Delivery status?
The revocation by LBMA of Good Delivery status for Russian refining plants has not yet had an impact on the cost of metals on the global and Russian markets. In essence, while Russian gold producers have lost the opportunity to cast ingots in Russia, the volume of gold supply on the world market has remained stable so far.
I recall a fairly old story: in the late 1990s, the Central Banks of the leading countries “amicably” dumped a considerable part of their gold reserves into the markets, as a result of which the price of gold fell to its lowest levels, $ 250 per troy ounce. Is there a possibility of the repetition of such a scenario?
Under conditions of high inflation, moving away from the US dollar as the only means of payment, and economic and political instability in the world, the repetition of this scenario is extremely unlikely. On the contrary, central banks continue to buy gold to diversify reserves and stabilize regional financial systems in the face of high inflation. In the first half of 2022, central banks acquired about 135 tons of gold in reserves, and demand in the second quarter increased significantly compared to the first. The largest buyers were the central banks of Iraq, Turkey, Kazakhstan, Uzbekistan, and India.