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Russian gold exports sanctioned: Reduced supply will increase its value

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The government announced that new exports of Russian gold will no longer be allowed to enter the UK, Canada, US and Japan. Here’s what the move means for UK investors.

The latest sanction on Russia following its invasion of Ukraine in February was announced at the G7 summit this weekend.

Gold is a major Russian export worth £12.6bn to the Russian economy in 2021. In recent months, its value has increased as the Russian elite and oligarchs rushed to buy bullion in an attempt to avoid the financial impacts of Western sanctions.

As London is a major global gold trading hub, taken together with the other UK sanctions, this “will have a huge impact on Putin’s ability to raise funds”, the government said.

The Prime Minister, Boris Johnson, said: “The measures we have announced will directly hit Russian oligarchs and strike at the heart of Putin’s war machine.

“Putin is squandering his dwindling resources on this pointless and barbaric war. He is bankrolling his ego at the expense of both the Ukrainian and Russian people.

“We need to starve the Putin regime of its funding. The UK and our allies are doing just that.”

Josh Saul, CEO of The Pure Gold Company, echoes the points on Russian demand for gold, adding that the investment group has had to turn away buy and sell enquiries from Russians despite some being existing customers.

Saul added: “The recent announcement on sanctioning Russian exports will (we expect) reduce supply and circulation of gold and silver within the market, thereby increasing its value and premium. Lower supply of gold may increase the cost of acquiring the metal and these premiums may be passed onto consumers by suppliers.”

However, he added that with its own customers, “this will affect us far less as we rely predominantly on our existing clients selling back to us (via our Buy Back Guarantee) as the primary source of gold supply”.

He said suppliers will need to be vigilant about the provenance of gold as those who end up with Russian gold may find it difficult to liquidate.

Further, there’s a huge amount of “reputational risk” associated with any supplier responsible for passing on Russian gold.

“It’s important to therefore only deal with suppliers who supply physical metal accredited by the LBMA and/or global mints who stand behind stringent supply chain policies,” he said.

Since the announcement of the sanction, the gold price has remained steady in GBP, EUR and USD, but is up 5% against the Russian ruble “which is more a reflection of a weakening currency than the gold demand within Russia”, Saul said.

And since the start of the war, gold demand is up 265% when compared to demand 2021 – typical behaviour from investors in times of volatility. This is because gold acts as a safe haven asset, with an inverse relationship to falling assets.

Saul added: “Financial factors influencing gold demand today include the rampant inflation rate which is rapidly eroding the value of assets held in cash or savings accounts (which continue to pay very low rates of interest), and rising interest rates which are intended to rein in inflation but are making the cost of borrowing higher.

“The cost-of-living crisis is impacting on all areas of society and the economy. The World Bank expects many countries are facing recession, and gold’s performance during the last global financial crisis and recession (the gold price almost trebled between 2007 and 2012) may provide some indication of its future potential. With inflation at such high levels, gold only needs to outperform other savings or investment products to be a prudent investment.”

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