Financial transaction

What traders think of the US-led effort to block gold trading by the Russian central bank

The United States made it clear on Thursday that any transaction involving gold linked to the Central Bank of the Russian Federation is covered by existing sanctions, but this is unlikely to have an immediate impact on the gold market. gold despite Russia’s $132 billion gold stockpile.

“Russia’s giant bullion holdings could, in theory, help fund its war machine if Moscow can find a buyer among foreign banks or governments,” Adrian Ash, research director at BullionVault, told MarketWatch. .

Read: How the United States and its allies can freeze Russian gold

In January of this year, the Central Bank of Russia held around $132 billion worth of gold, according to the Brookings Institution, a Washington, DC think tank. GC00 gold futures price,
+1.43%

GCJ22,
+1.43%
rose above $2,000 an ounce earlier this month to trade at its highest level in about 19 months.

“Until recently, Russia’s central bank was a net buyer of gold and has a substantial inventory,” said Jeff Wright, chief investment officer at Wolfpack Capital.

But selling its gold would probably not be Russia’s first choice.

The “first and most likely option” to fund war and invasion and support the Russian ruble would be additional oil sales to Russian-aligned countries at a discount, rather than selling gold, Wright said at MarketWatch.

Russia’s liquidation of a significant percentage of gold “would signal a complete collapse of its economy and banking system – more so than the sanctions currently imposed, and a sign of weakness by the Russian leadership”, he said. .

Ban gold transactions with Russia

In the background, press the call on President Joe Biden’s meetings with the Group of Seven and the European Council, a senior US administration official says that the Group of Seven countries and the European Union will continue to “blunt” the capacity of the Central Bank of Russia “to deploy international reserves by clearly indicating that any transaction involving gold linked to the Central Bank of Russia is prohibited.

Read: New US sanctions on Russia target 48 defense companies, 328 lawmakers and gold reserves

The US official pointed out that in June last year, gold accounted for 20% of the Russian central bank’s reserves.

Also on the call, the US official said there was speculation that Russia would try to use its gold reserves to prop up the ruble RUBUSD,
-5.38%
— by selling its gold to buy money. The Russian currency crashed after the invasion as the United States and its allies announced sweeping financial sanctions against Moscow, falling to an all-time low against the dollar. The ruble has since rebounded, but remains down 27% against the dollar since the start of the year.

“U.S. persons, including gold traders, distributors, wholesalers, buyers, individual traders, refineries, and financial institutions, are generally prohibited from engaging in or facilitating prohibited transactions, including gold-related transactions in which blocked persons have an interest”, according to a statement from the Treasury on frequently asked questions.

Gold can be an ‘untraceable store of value’

“Any sanctions on Russia’s gold reserves would do little more than expose how government bureaucrats don’t understand gold,” Brien Lundin, Gold Newsletter’s editor, told MarketWatch. “The beauty of gold, unlike currencies, is that it is an untraceable store of value that has no counterpart,” he said.

“At least in small quantities, Russia could easily sell gold on the open market,” he said. “In large quantities, he might as well sell the gold to China without any record of the transaction,” said Lundin, adding that China had demonstrated that it was an “greedy buyer of gold.”

He believes the end result of gold-related actions would be “to alert the 36 countries that hold significant shares of their gold reserves in New York Federal Reserve Securities that they should take back their gold as soon as as possible”.

If this were to happen, it would “create significant turbulence in the gold market since the [Federal Reserve] demonstrated difficulties in finding and transporting the gold held for other countries,” Lundin said. the The Fed told Germany it would take seven years to repatriate only part of their assets, although it only took four years, he said.

Russia remains a major player in the gold market

Yet Russia is undeniably an important player in the global gold market.

“Russia is the second or third largest producer of gold in the world, depending on which data you follow, and it accounted for more than one in four bullions shipped in 2021 in London, the heart of the global bullion market,” said Ash of BullionVault. .

Even so, he doesn’t believe the news means much on its own “because London has already banned new Russian supplies, as has the CME CME,
-0.62%
in New York,” he said. Still, the loss of those flows, along with the additional coverage from today’s Treasury announcement, could help support, if not boost [gold] prices”, given that gold is “driven more by sentiment than by fundamentals”.

So while the lack of Russian production did not drive the market higher during Western sanctions against Russia’s annexation of Crimea in 2014, “this latest flurry of headlines matches the broader market narrative of raw materials from a tighter supply that pushes prices up,” Ash said.