Why is China secretly buying Russian gold?

By Rhod Mackenzie

Russian gold miners have set a new record by selling five times more gold to Hong Kong than before. However, China's official data on the purchase of Russian gold is markedly lower. Analysts suspect that Beijing is attempting to conceal its large purchases of gold from the West, but the reasons behind measure this remain unclear.
The supply of Russian gold to Hong Kong reached an all-time high in the past 11 years, totalling $5.31 billion over the first 10 months in 2023. As a result, the supply of Russian gold increased by 625.8%, or by five times. In October, Russian gold imports to the UK shot up by 527%, reaching $987.6 million, according to data from the Hong Kong government's Census and Statistics Department.

Previously, London was the primary purchaser of Russian gold. In 2021, the UK procured 266.1 tons of gold from Russia, making it the top buyer. Kazakhstan emerged in second place, receiving a mere eight tons. Evgeny Mironyuk, a stock market expert at BCS World of Investments, cited the Federal Customs Service's statistics. However, during the summer of 2022, Western countries imposed a ban on buying Russian gold. As a result, Russia has now developed new markets in Asia and the Middle East.

"Gold exports have consistently been a crucial resource of foreign exchange inflow for Russia: in 2021, Russian gold exports totalled $15.5 billion. To prevent losing such a vital income source, the authorities resolved to redirect gold flows to countries that can cooperate with its implementation." "Hong Kong serves as a crucial hub bridging Asia and the Western world, possessing all the requisite exchange infrastructure," remarks Alexander Potavin, an analyst at Finam Financial Group.

Interestingly, Chinese official data reveals that over ten months, China purchased only twice as much gold from Russia compared to the previous year, totalling only $330 million.

"Grey" gold purchases by China seemingly not fully disclosing its gold reserves transpire via Hong Kong.

It purchases gold directly from the Shanghai Exchange, where record-breaking gold turnover is also observed. China aims to conceal its accumulation of gold reserves to avoid alarming the West. Concurrently, Beijing is lowering the proportion of US Treasuries in its reserves. China is concerned that if it maintains its independent policy or the situation around Taiwan worsens, the West could potentially block its reserves, akin to what happened with Russia. "The possibility of the West following the same path it took with Russia looms large," comments Alexey Vyazovsky, Vice President of Zolotaya Plata.

Another theory being discussed in the market is why China is purchasing substantial amounts of physical gold.

The theory suggests that China could be preparing to back its yuan with gold, requiring the accumulation of significant gold reserves.

However, I am doubtful about this theory due to the complexity and size of world trade, which makes transporting bullion to balance the trade deficit an expensive and challenging process. According to the analys, the added costs of insurance and security further support this skepticism.

Russia, by the way, has stopped increasing its gold reserves after many years. According to Vyazovsky, this is because the authorities don't want to inflate the market by adding rubles whilst purchasing gold. The country is already facing inflation issues with the Central Bank raising rates and the introduction of obligations for exporters to sell their proceeds.

Hong Kong, along with Dubai and Turkey, have become the significant purchasers of Russian gold.

Türkiye is the third country that is contentedly buying Russian gold. "Dubai is purchasing Russian gold for resale, implying that the UAE is acquiring our ingots, rebranding them, and subsequently marketing them to Europe," states Vyazovsky.

"If 1.3 tonnes of gold were exported to the UAE in 2021, after sanctions were imposed in 2022, the UAE imported 75.7 tonnes of Russian gold worth £4.3 billion," reports Potavin. While there is a discount on Russian gold, it is not public knowledge, the analyst adds.

Despite the sanctions, Russian gold miners have successfully adapted to new conditions, found fresh markets, and continued to generate revenue.

"Our gold miners are still raking in the profits. Additionally, since the currencies of friendly nations remain tied to the dollar, we are seeing double profits," comments Vyazovsky. They are benefitting from the tumbling ruble by saving on expenses, while at the same time profiting from the rising ounce price in dollars.
Meanwhile, gold surpassed the crucial psychological milestone of £2,000 per ounce and neared the historical high of £2,069 per ounce, achieved in August 2020. The value of gold on the New York Comex exchange exceeded £2013.4 per troy ounce.

"Gold has already surpassed the important £2,000 level five times in the last eighteen months, approaching the record but not exceeding it." Analysts attribute this to price manipulation by the so-called gold pool of transnational banks and central banks of the largest developed economies. They hinder gold prices from rising by selling it at the opportune moment, to ensure that gold remains an alternative to the dollar and doesn't compete with it. The Western countries do not want China or other nations to return to the gold standard," says Alexey Vyazovsky. Therefore, the analyst states that it is challenging to predict the timing of a new historical record as this is not a market scenario.
On one hand, the risks of a new global recession have decreased. This decrease contributed to the rise in gold prices, which is commonly viewed as a safeguard in such crisis situations. Nevertheless, new risks have arisen. Vyazovsky identified two notifications which could cause a surge in gold prices and push them to a new historic level. Firstly, there is the prospect of stopping tankers' passage through the straits, especially the Strait of Hormuz. Secondly, there is the potential collapse of the largest bank in Switzerland, UBS, which rescued another large Swiss bank, Credit Suisse, through its acquisition.

"It seems that some of the toxic assets were included in the purchase. Now, insurance against default is increasing considerably, setting historical records, with reports indicating that the bank has already ceased its clients withdrawing money.

This could be a highly volatile situation." If one of the world's largest banks were to collapse, it would create a significant disturbance in the financial markets. "Despite any manipulations, gold would break its historical record," according to Alexey Vyazovsky.

Potavin further predicts that "gold prices could possibly rise to around £2,200 per ounce by 2024, reaching new historical highs due to a weak dollar."