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LAWRIE WILLIAMS: Russia halts gold buying in April, but does this have a real demand impact?

As it had projected, the Russian central bank did not buy any gold in April and there is as yet no indication when, or if, it will resume gold purchases this year – or indeed at any time in the future.  The Russian central bank had been the leading official buyer of gold for the past several years by taking up domestically-mined gold at a rate averaging about 200 tonnes a year, but has ceased this in favour of the Russian gold mining sector selling its gold on international markets, thereby adding a positive income stream to its balance of payments given the huge decline in oil and gas prices – previously the country’s principal export by value.

Russia is currently the world’s third largest gold producer, and there are plans by some of its major gold mining companies to raise gold output further over the next few years.  There may however be a temporary hiatus in the planned production increase if some mines are forced to suspend production due to the COVID-19 virus which has seen Russia rise to second place in the global total of confirmed infections after the U.S.  Russia’s largest gold mining company, Polyus Gold, has reported virus cases at its biggest mine, Olimpiada at Krasnoyarsk in Siberia, which employs almost 6,000 workers, although the company has not yet reported any interruption to its operations there.  But the outbreak is considered serious enough (unconfirmed reports say that some 900 workers have tested positive e for COVID-19), for Russian authorities to bring in the military to cordon off the mine, and are constructing a 1,000 bed temporary hospital  as back-up for a 400-bed hospital erected at Olimpiada in May.  Additional medical staff have also been flown in.

That the administration has taken these steps without ordering a shutdown of operations, suggests that it feels that the gold mining sector is not only just a key industry, but one that is vital to Russia’s economy.  It has pretty much run down its holdings of U.S. Treasuries in its reserves, primarily replacing them with gold and other currencies considered as reserve assets.  Indeed its gold purchasing over the past few years has been a valuable factor in maintaining reserve value, given the decent increase in the gold price over the past three years.  Despite U.S.-imposed economic sanctions, Russia seems to have been far more adept than the U.S. at keeping its economy balanced without running  up huge debt positions, although the effects of the COVID-19 virus may put this debt control seen to date under pressure.

On central bank gold purchases, the absence of Russian buying from the beginning of April will likely put a dent in overall central bank gold demand which came in at around 660 tonnes in 2019 – particularly as China is not reporting any current buying either.  There is anecdotal reporting that some other central banks may be stepping up to fill the gap, but there’s little evidence in published Q1 figures that this is yet the case.  However the huge inflows so far this year into gold-backed ETFs looks to be more than making up for any demand shortfall from reduced central bank purchases.  Maybe we should wait on the statistics on demand this year from the major consultancies which have teams of analysts assessing the latest data before we draw any conclusions on overall supply/demand fundamentals for 2020!

21 May 2020 | Categories: Gold, Russia

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