Russia buy gold at a fixed price, what does that mean for the gold market?

The Russian central bank is going to Buy gold to stabilize the domestic gold market. Between March 28 and June 30, it will open its gold counter, allowing domestic banks to offer gold at a fixed price of 5,000 rubles per gram during this period. After this period, the central bank will evaluate the asset purchase program and announce a new gold price. With this purchase program, the central bank is putting a floor under the Russian gold market.

The announcement of this decision is striking for several reasons. In the first place, due to the changing policy of the central bank. End of February Announced She also resumed her gold purchases, but not much later she withdrew that plan. The reason for this was the Kremlin's decision to make gold bars VAT-free. As a result, domestic demand for investment gold increased considerably. In order not to disrupt the market, the central bank then decided to take a step back.

Russia is putting the bottom under the gold price?

The second thing that stands out about this announcement is that this time the central bank has set a price and it is also making it public, which is 5,000 rubles per gram. A price that is fixed for the next three months. Given the extreme volatility of both gold and the Russian ruble in recent weeks, this is a remarkable signal.

When the central bank announced this measure on March 25, the gold price stood at more than 6,000 rubles per gram. At that time, the central bank offered considerably less than the market, but due to a price drop at the beginning of this week, the market price on March 29 was only 5,290 rubles per gram. If the price of gold in dollars falls further or if the ruble rises further in value, the market price could fall below that fixed rate of 5,000 rubles.

That would mean that the central bank is above the market price and has thus effectively put a floor under the gold price for the next three months. Russian banks and the country's gold mining sector would rather sell their gold to the central bank than to the free market. Whether that is the intention, that remains unclear. The press release central bank information.

Gold price in Russian rubles

What does this mean for the gold market?

The gold market is of course bigger than Russia, because most gold is still traded in London and New York. Nevertheless, it is important to keep an eye on developments in Russia because the country is the second largest gold producer in the world. Last year, 330 tonnes of new Russian gold came onto the market, much of which was destined for export. Much of this gold eventually ended up in London gold vaults, namely in the stocks of various gold ETFs.

The Russian central bank's decision to buy gold at a rate that may be higher than the market price in the future could have the effect of drying up Russian gold exports. It is then more interesting for Russian gold mines to sell directly to the central bank. As a result, the tightness in the physical gold market will increase. Especially when the demand for the precious metal in Western economies remains so high.

Is this a revaluation of gold?

In recent weeks, we have heard various analyses about a possible revaluation from gold via oil or gas. Russia could decide to accept gold instead of rubles as payment for these strategic commodities, providing much more oil or gas than countries pay in physical gold. By assigning a higher valuation to gold in this way, there would be a worldwide run on the precious metal, resulting in a much higher gold price.

This scenario is still conceivable and feasible, but at the moment it is not yet the case. However, the Russian government has again announced its position this week that it wants to pay for gas in rubles from 31 March. If European countries don't want that, Russia can always play the golden card.

This contribution comes from Geotrendlines

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On behalf of Holland Gold, Paul Buitink and Joris Beemsterboer interview various economists and experts in the field of macroeconomics. The aim of the podcast is to provide the viewer with a better picture and guidance in an increasingly rapidly changing macroeconomic and monetary landscape. Click here  to subscribe.