Experts joke that some Russian-mined gold in British vaults “is so old it has double-headed Imperial eagles stamped on it”. Ownership shifted into non-Russian hands decades ago, they say. But investors are worried that Russian gold could be used for sanctions busting. The London Bullion Market Association is therefore registering it all.
The anxiety of investors is apt. Gold is the currency of fear and distrust. The financial systems of the democratic west and authoritarian east are pulling apart amid mutual recriminations. That extends the potential role of gold for national reserves and for transactions where no questions need be asked.
Investment fundamentalists dismiss the yellow metal as yieldless and useless. The market disagrees. Gold is trading at $1,840, per troy ounce, close to record highs. The war in Ukraine has fostered heavy demand.
Just before Christmas, the World Gold Council, a UK-based industry body, estimated year-to-date cumulative purchasing in 2022 of 673 tons led by governments. That included 400 tons in the third quarter, a level described as “heroic” by Adrian Ash of BullionVault, a trading platform.
This contrasted with a figure of just 333 tons in the first nine months of 2022 reported by central banks to the IMF. Some of the discrepancy may be explained by differing sample groups and time periods. But it is hard to imagine that all of it is.
Moreover, in the 12 months to November, gold in British vaults — the biggest repository — fell by 500 tons, more than 5 per cent, according to LBMA data. At today’s price, those ingots were worth $30bn.
The inevitable inference is that nations challenged by the so-called “tyranny of the dollar” are quietly buying gold to replace foreign currency in reserves or for other purposes. Russia springs to mind: most of its government institutions, banks and bigwigs are covered by sanctions. China is also subject to a growing raft of trade curbs amid tensions over Taiwan.
“Coals to Newcastle,” sceptics say. China and Russia have plenty of gold from their own mines. Moreover, gold is a pretty clunky substitute for dollars, as Barry Eichengreen, a Berkeley economics professor pointed out in a recent report. He noted: “Shipping $1bn of gold would require six 20-foot trucks.”
Payment via Swift is certainly easier. But Russia has been largely excluded from an international banking system. China is keen to find alternatives, too.
Gold is routinely shunted round the world despite its weight. Whenever you fly from London to Zurich, the hold is likely to contain some gold ingots alongside your suitcase. One ounce of gold is fungible with another. There is a large retail market for the stuff via the jewellery trade. Prices are volatile, but less so than for cryptocurrencies.
Gold can also be traded more easily beyond US oversight than dollars. For unaligned states, dollar dealings too often touch New York’s markets. They are also likely to feature the multinational banks through which American regulators achieve extraterritorial reach.
Increasing gold reserves — without pushing the price up by admitting it — would be a pragmatic move for Russia and China. Using the commodity as a transactional currency would be a natural extension of the policy but would represent a shift from sanctions avoidance to sanctions busting.
That would be nothing new. A decade ago, Turkey allegedly paid billions in gold for natural gas from Iran, under heavy sanctions for its nuclear programme. Switzerland was the main source of bullion. Iran swapped some of it in the United Arab Emirates for foreign currency, according to a report from the Global Initiative against Transnational Organised Crime, a Geneva-based non-profit organisation.
In 2020, the Financial Action Task Force, a G7 body, found that UAE’s large, active market in physical gold still created substantial money laundering risks. The Gulf federation has promised to clean up its act. That is just as well. Dubai is becoming a home-from-home for Russians and their assets.
Sanctions enforcers should also take a close interest in the gold market in London. More than 9,000 tons of the metal, worth some $544bn at current prices, sits in repositories within the M25, more than in Fort Knox. The city has a history of embroilment in money laundering. Investors should be wary of the gold stored in London’s secretive, subterranean vaults.