Russian consumers continue to buy more gold bullion

By Rhod Mackenzie

The Russian bank VTB published figures regarding their sales of gold ingots to individual customers. It appears that Russians are still keen to buy gold, and this autumn the demand has gone up. What is the reason behind this sudden craze for gold and what other ways are there to generate interest in gold to the general population?
Since March last year, sales of gold to individuals through VTB have been around 55.5 tonnes, and over this period the demand growth has only gained momentum. As a result, sales in November have surged by 21% compared to October, amounting to 3.7 tonnes. The bank's press service stated that the average volume of sale has increased by one-third since the beginning of the year to 18 kilograms. The majority of transactions with precious metals occur in Moscow.

What motivates the public to purchase large quantities of gold? VTB's spokesman explained that a significant amount of investment gold was sold to individuals at the time of the 20% VAT being abolished in March last year. During October and November, the demand for gold increased significantly due to seasonal factors, as well as the buyback option launched by VTB earlier this summer.

This option allows clients to sell gold stored within the bank, and the government has removed not only the VAT on bullion but also personal income tax for a period of two years. These tax preferences are a positive step forward for the government. Another factor contributing to this trend is the rising price of gold, which set another historical record of £2,140 per ounce last week, causing the ruble to weaken. We have yet to reach a consolidation level above 6,000 rubles per gram, but anticipate a surpassing of it by year-end. As the dollar value of an ounce increases, and the ruble continues to weaken against the dollar, many investors view gold as not only a lucrative investment but also indispensable insurance against a falling ruble.
"Since the start of the year, the price of gold has increased by 30% in rubles," stated Alexey Vyazovsky, the Vice President of Zolotaya Plata.
The demand for protective assets, like gold and other precious metals, escalated due to the unprecedented fluctuations in the ruble and persistent high inflation projections during Q3 of this year, according to Evgeniy Mironyuk, a market analystt at BCS World of Investments.

Also, the imposition of sanctions has motivated individuals with spare cash to invest in gold.

"Numerous wealthy individuals I converse with have been sanctioned, resulting in their Western accounts, shares, and funds being blocked, leading them to lose faith in the international banking structure".
Buying bullion that can be stored securely has now become especially valuable for some. "I know people who purchase tens of kilograms of bullion - this used to be a rare occurrence," says Vyazovsky.

Demand for gold is being fuelled by the sizable funds available in investors' accounts, in addition to a marked decrease in available investment options in the Russian jurisdiction. The Moscow Stock Exchange turned over more than 1.2 quadrillion rubles over 11 months in 2023. Furthermore, retail investors' accounts have amassed a total of 9 trillion rubles. The substantial liquidity surplus in the Russian market and the accumulation of capital among individual investors can be attributed to a 20.5% year-on-year increase in the money supply, a shortage in the labour market resulting in higher wages, and budgetary incentives," according to Mironyuk.
Simultaneously, the market for the sale of gold to individuals is progressing not just in terms of demand, but also in terms of supply, as the variety of gold coins and bars is increasing.

Furthermore, the issue of the vast disparity between the sale and repurchase prices of gold bars is being addressed by the upsurge in participants and competition among them. If just a few years ago in Moscow only five or six banks traded gold bullion, now there are more than 20 banks and several are in the process of obtaining a "gold" license from the Central Bank. Unexpectedly, Goznak was granted permission to trade gold bullion with individuals in the form of coins and bars, as well as to store the metal remotely. The refineries that produce the bullion were also permitted to sell gold, and dealerships can now sell coins.
Purchasing physical gold is an uncomplicated process. You can purchase a 100-gram ingot or a 15-gram St. George coin directly at the till and receive the valuable metal instantly. Some may securely store the bullion at home, while others may prefer to rent a safe deposit box at a bank."

There is an issue with safety deposit boxes: the law does not safeguard the owner of the box. There have been instances when criminals have broken into deposit boxes inside vaults, and the court has supported the bank. For instance, imagine that the previous user of the box duplicates your key, and if the bank neglects to modify the lock cylinder, then the delinquent removes another box situated nearby, enters the vault, and opens your box.

For instance, imagine that the previous user of the box duplicates your key, and if the bank neglects to modify the lock cylinder, then the delinquent removes another box situated nearby, enters the vault, and opens your box. The vault does not have any cameras inside it. Upon arrival, you realize that the bank has no record of the money or bullion you deposited, as noted by Vyazovsky.

When considering mandatory insurance (an unspecific metal account) or a metal bank deposit, the principal issue at hand is that the prices are not very encouraging when matched against the quotes from both the Central Bank and the stock exchange. Furthermore, these deposits do not qualify for the deposit insurance regime, the analyst elucidates. Although VTB has observed a rise in the demand for the mandatory insurance, Mironyuk opines that physical gold is reserved for the affluent, as it is essential to factor-in security expenses or safe deposit box rentals. "It is considerably more convenient to invest in gold via mandatory insurance, mutual funds, and trust management techniques having a 100% correlation with gold prices."

There are also assets that highly correlate with the price of gold, such as gold mining equities. With these, investors can benefit from both dividend payments and capital appreciation when companies generate profits," suggests the analyst

To further boost demand for gold, Vyazovsky recommends expanding the range of products available and, most importantly, decreasing the weight of gold coins. "The minimum threshold for entry into the gold market is a three-gram coin featuring “St. George the Victorious,” which has a price of over 20,000 rubles. One-gram coins, packaged in blisters for easy distribution and convenient gifting, are popular in the West. Each gram of gold may cost up to 7000-8000 rubles He believes that lowering the threshold makes investing in gold more appealing to the general public."

As for the price of gold, it is expected to increase, with analysts predicting a rise in line with VTB's forecast. They believe that in 2024, when global central banks initiate a reduction in interest rates following an economic slowdown, gold prices will begin to climb.

"The most optimistic forecast points to gold reaching 7,200 rubles per gram next year. We hit such a historical high point in March 2022. In dollars, gold has already set a record of $2140 per ounce. Vyazovsky predicts that $2,200 per troy ounce in the summer is very likely next year."