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Commodities Corner: What traders think of U.S.-led efforts to block gold transactions by Russia’s central bank

The U.S. made it clear on Thursday that any transaction involving gold related to the Central Bank of the Russian Federation is covered by existing sanctions, but that’s unlikely to have an immediate impact on the gold market despite Russia’s estimated $132 billion in gold stockpiles.

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

Read: How the U.S. and allies can freeze Russian gold

The Central Bank of Russia in January of this year held about $132 billion in gold, according to the Brookings Institution, a Washington, D.C., think tank. Futures prices for gold
GC00,
+1.48%

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+1.48%

topped $2,000 an ounce earlier this month to trade at their highest level in about 19 months.

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

But selling its gold likely wouldn’t be Russia’s first choice.

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

Russia liquidating a meaningful percentage of gold would “signal a complete collapse of their economy and banking system — more than the sanctions currently imposed, and a sign of weakness by Russian leadership,” he said.

Prohibiting gold transactions with Russia

In a background press call on President Joe Biden’s meetings with the Group of Seven and the European Council, a senior U.S. administration official said the Group of Seven nations and European Union will continue to “blunt” the Central Bank of Russia’s “ability to deploy international reserves by making clear that any transaction involving gold related to the Central Bank of Russia is prohibited.”

Read: New U.S. sanctions on Russia target 48 defense companies, 328 lawmakers, gold reserves

The U.S. official pointed out that as of June last year, gold represented 20% of Russia’s central bank reserves.

Also during the call, the U.S. official said there’s speculation that Russia is trying to use its gold reserves to prop up the ruble
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— by selling its gold to buy the currency. The Russian currency collapsed following the invasion as the U.S. and its allies announced sweeping financial sanctions against Moscow, falling to an all-time low versus the dollar. The ruble has since bounced, but remains down 27% versus the dollar so far this year.

“U.S. persons, including gold dealers, 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 release from the Treasury on frequently asked questions.

Gold can be an ‘untrackable store of value’

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

“At least in smaller amounts, Russia could easily sell gold on the open market,” he said. “In bulk quantities, it could just as easily sell the gold to China with no record of the transaction,” Lundin said, adding that China has demonstrated that it is an “eager buyer of gold.”

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

If that happened, that would “create significant turmoil in the gold market since the [Federal Reserve] has demonstrated difficulty in actually finding and transporting the gold held for other nations,” Lundin said. The Fed famously told Germany it would take seven years to repatriate just a portion of their holdings, though it took only four years, he said.

Russia’s still a big player in the gold market

Still, Russia is undeniably a significant player in the global gold market.

“Russia is the second or third largest gold miner in the world, depending on whose data you follow, and it accounted for more than one in every four bars shipped in 2021 into London, the heart of the global bullion market,” said BullionVault’s Ash.

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

So while the absence of Russian output didn’t send the market higher during the Western sanctions over Russia’s annexation of Crimea in 2014, “this latest flurry of headlines fits the wider commodity-market narrative of tighter supplies driving prices upwards,” said Ash.

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