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Western sanctions against Russia can disrupt the gold market in several ways. Restrictions on air travel will make it more difficult for Russia to export gold to Europe, while the exclusion of several Russian banks from the SWIFT payment system could become an additional obstacle. These banks play an important role in the Russian gold market. And then we haven't even mentioned a possible boycott of Russian smelters. In this article, we explain the consequences that Western sanctions can have on the international gold market.
In the spring of 2020, the gold market was disrupted by the corona pandemic. To limit the spread of the virus as much as possible, countries worldwide restricted air traffic. This had a major impact on the international gold market, as passenger planes are typically used to move gold bars to other countries. As a result, premiums and delivery times increased.
Because air traffic had thinned out, it was not possible to transport enough gold between major hubs in the gold market, resulting in large price differences between gold in the United States and the United Kingdom. Mines were also no longer able to export their gold so easily to important hubs such as Dubai and Switzerland. When the flight restrictions were lifted, gold was poured out en masse Switzerland It took until the autumn of 2020 for the market to stabilise again.
These countries have closed their airspace to Russian planes
Bloomberg Reported last week that Russian palladium producers are looking for alternative routes, now that many Western countries no longer allow regular passenger flights from Russia. Russia has a 40% share of global palladium production, making it vital for the palladium market. The country must therefore look for other ways to get this precious metal to its customers. These are mainly car manufacturers, who process the precious metal into catalytic converters. Due to the tightness in the palladium market and the geopolitical turmoil, the palladium price has already risen by more than 30% this year.
There is a good chance that these problems will also have an impact on Russian gold exports. In recent years, Russia - as the third largest gold producer in the world - has started to export much more gold. A large part of this goes to the United Kingdom, where the largest gold ETFs in the world hold their stocks.
Let's look at the Full list with gold bars from the SPDR Gold Trust (GLD), the largest gold ETF in the world, then we see dozens of pages of gold bars from Russian smelters. In the vault of this gold fund are almost a thousand gold bars of 12.5 kilos. Many of these have only been added to the stock in recent years. The restriction on air traffic between Europe and Russia means that Russian gold must now be diverted to the European market.
Many Russian gold bars on the SPDR Gold Trust's bar list (Source: SPDR)
Another problem for the gold market is the exclusion of a number of banks from the SWIFT payment system. Banks such as VTB, Sberbank and Gazprombank play an important role in the Russian gold market. They buy up domestic gold mining production and sell it on to the central bank or abroad. If these banks fall under the Western sanctions policy, this would also affect the export of gold.
The loss of Russian supply in the global gold market would mean that there would be much less precious metal on the market, further increasing the pressure on the market. Especially now that the price of gold is rising and many investors in Europe and the US are seeking refuge in the precious metal. More demand and less supply means that premiums in the gold market could rise further.
Shortly after the introduction of the sanctions, the central bank of Russia announced that it would is going to buy gold from domestic mines. Gold is a safe alternative to currency reserves, because gold stocks are not affected by sanctions. This means that there is less Russian gold left for export.
In 2018 made it to the the London Bullion Market Association (LBMA), the Russian smelter Ekaterinburg of its 'Good Delivery' list. The reason for this was that this smelter was controlled by the Russian oligarch Viktor Vekselberg. There is a chance that more Russian smelters will now come under a magnifying glass. For example, gold market analyst Ronan Manly noted last week that Russia's VTB Bank and Bank Otkrytie were off the LBMA's approved list remote.
The question is what the LBMA will do now with large Russian gold smelters such as Krastsvetmet, Prioksky and Moscow Special Alloys Plant, since they are all indirectly property from the Russian government. In 2018, Krastsvetmet alone processed 234 tonnes of gold, three-quarters of Russia's total gold mine production in that year. If these three smelters also end up on a Western sanctions list, it will be a major problem for the global gold market. If gold bars from these smelters lose their LBMA accreditation, they will be less easy to trade.
The West's economic and financial sanctions against Russia can therefore also have an effect on the gold market, just as they already have an effect on the global oil market. We will continue to monitor these developments closely.
This contribution comes from Geotrendlines
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