Gilded Age: Why Russians are hoarding gold

No one in the world privately owns as much gold as Indian households collectively—an estimated 25,000 tonnes of yellow metal valued at over $1.5 trillion by the World Gold Council.

But the Russians could soon be giving the Indians a run for their money. Or maybe gold.

Demand for the precious metal rose by a staggering 350 percent in the first half of 2022, say experts at the World Gold Council, which monitors the global market for the sector. Russians are estimated to have bought 12 tonnes of gold bars and coins since February, spooked as they were by fears over stability of the ruble following western sanctions on Moscow.  

Russia launched a “special military operation” in Ukraine in late February. US-led western nations retaliated by slapping wide-ranging sanctions on Moscow.

The Russian government also actively prodded the citizens to invest in gold.

Why has demand gone up?

Since February, the demand for gold has increased and remains at a high level because the fluctuations of the ruble are hardly predictable, and the risks in the economy and political life remain very high, explains Oxana Lukicheva, analyst of commodity markets in Otkritie Investments.

On March 2, Prime Minister Mikhail Mishustin said: "Such investments (in gold) may be a good alternative to buying currency.” In fact, at the same time the head of the Ministry of Finance Anton Siluanov called gold an "ideal alternative" to the US dollar. The US currency is volatile, exposed to risks and “is not a worthy competitor to the precious metals”, he explained.

Demand for gold bars especially increased after the introduction of serious tax breaks. Earlier, purchase of a gold bar in the bank invited a value added tax (VAT) of 20 percent. But it was impossible to get a refund of the tax when selling the bar. This  extra cost made operations with bullion unprofitable for the citizens. 

But in June, the 13 percent personal income tax on the profit from sale of gold bars was withdrawn as well. 

How much gold is bought?

In the first five months of the current year, customers of Sberbank purchased 10.9 tonnes of gold bars, the widely read Kommersant reported. VTB reported the sale of two tonnes of gold to clients in the middle of April. More recent data from the bank was not available. 

Other major banks, like RSHB, MKB and  Sovcombank, also noted a "high demand for gold" in recent months but did not disclose the gross figures. PSB has sold one  tonne of gold bars to clients over the past four months.

The explanatory memorandum to the bill on the abolition of VAT noted that the potential demand for the precious metal in bars among citizens may reach up to 50 tonnes per year, which is 15 percent of the country’s production. 

However, according to assessments of Alina Kolpakova, head of Sokolov analytical centre,  the demand might be around 10-11 tonnes per year in small bars weighing up to 20 gm.

Who is buying? 

Experts conclude that mostly the rich Russians are actively buying the precious metal, since a significant proportion of gold sold in these months was large bars. Under current conditions, a 13-kg gold bar is cheaper than several small ones of the same weight. weighing the same. "Wealthy clients often prefer to keep up to 20 percent of their portfolio in physical gold," said Evgeny Safonov, director of PSB's private capital department.

Kommersant reported that VTB sold even 100-kg bars. Customers of MKB were interested in standard bars of 11 to 13 kg. In Sovcombank, clients most often purchased measured bars of 1 kg and standard bars of 12.5 kg. In Rosselkhozbank, the leaders of sales were 5g and 10g bars. "The number of five-gram bars accounted for 17 percent  of the total number of bars sold in the past four months. "1 kg bars are also popular," the bank notes.

At the same time, Sberbank insists that at present "demand for large bars of 1 kg and more is gradually reducing”, while demand for bars of smaller denominations remains high. However, experts warn that investment in gold bars is a long-term investment, even without tax restrictions.

What are the disadvantages?

Purchase of bullion is more a question of saving rather than getting a large income, financial analyst of CMS Group Vladimir Sagalaev told Izvestia. The notable income from investing in gold bars is observed in the long-term outlook, that is more than 10 years. 

Besides, investments in bullion do not yield passive income like stocks, bonds, mutual funds and deposits. This can be a problem if a client is looking for a way to generate passive income through investments.

The fundamental point is also that banks buy bullion back in a limited number of branches and predominantly their own bullion. At the same time, the purchase price is 15-25 percent lower than the sale price. An increase in the value of gold is possible only in case of depreciation of the Russian currency.

Besides, it is necessary to provide expertise and perfect condition of the "precious brick" for sale. "Damage to a bar, even a small scratch, instantly devalues it radically," Evgeny Nadorshin, chief economist at PF Capital notes. 

 Financial analyst Sagalaev points to a few drawbacks of keeping gold. Because of their value, gold bars are subject to theft, and it is better to store them in a safe place, like a vault, which has some inconveniences.. A bank is a good alternative, but gold owners will have to pay for this service. Sagalaev also notes that alternatives, such as gold accounts and gold exchange investment ETF funds have no storage problems, because they are investments in "paper" gold.

How did the price fall?

There's another "but" that both the authorities and the banks prefer to keep quiet about right now. 

Those who bought gold at the peak of the sanctions panic, soon discovered that their gold was rapidly depreciating, The Moscow Times reported. From 7.7 thousand rubles per gm on March 11, the accounting price of refined gold set by the Central Bank of Russia plummeted by 56 percent to 3.4 thousand rubles as of August 5.

As a result, the amount of gold held by individuals at the end of the first quarter and worth 33.7 billion rubles, fell to 22.2 billion rubles on August 5. Therefore, the loss for this period, as calculated by the publication, was 11.5 billion rubles, according to data from the Central Bank.

But the gold boom is still not subsiding. "Additional support for sales will be provided by the intensification of the devaluation process, which may bring some funds from the accumulated foreign currency reserves of the population (according to the recent estimate of the Central Bank, of about $85 billion) to the gold market," Lukicheva, a commodity markets analyst, adds.

What's the bottom line?

On the bright side, the price of gold neither falls nor fluctuates much even during a crisis compared with other assets, such as stocks, Sagalaev says. Gold also has a steady rise in value. "Thus, it is a good protective asset and a means of saving," the analyst stresses. 

He explains, "Historical data shows that gold does well in inflation during economic highs and lows. If a currency has virtually no value, gold prices will rise simply because it will be valued in the same monetary unit. This means that gold is one of the best protections against inflation."In addition, gold can be used as collateral for secured loans.