The casual weekend investor may be given pause by this paradox: While inflation in the West remains uncomfortably high and the U.S. economy is booming, the spot price of gold continues its historic rise . Normally, as a world leader savings If the currency heats up, investors will cool off on precious metals because they pay no interest or dividends, although they can be seen as retaining at least some significant value.

Gold is therefore traditionally considered a safe haven in bearish bond and/or stock markets. Why, then, has the price of gold continued its historic rise over the past two years, reaching an all-time high of $2,790.07 per ounce? in October, when the world’s largest economy, for example, was booming at the same time? On March 20, 2020, $1,488 would buy you one ounce of gold.

At one point on Tuesday, the price settled at $2,675. As these dates might suggest, the Russian The invasion of Ukraine is a good place to start looking for answers. On the one hand, investors typically flock to gold when geopolitical tensions are high, as was certainly the case when Russian President Vladimir Putin raised the specter of nuclear strikes last month.

“Obviously it has sparked interest in safe havens,” Peter Grant, vice president and senior metals strategist at Zaner Metals, told Reuters in late November. And then there is the gold rush of the Kremlin itself.

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“A wake-up call for central banks around the world”

Last month, Russia’s Finance Ministry announced it would increase its daily purchases of foreign exchange and gold by 35.5 percent. Moscow’s gold reserves had already surpassed the $200 billion mark for the first time in October, reaching a record $207.7 billion.

“Since 2022, gold prices have jumped 40 percent even as U.S. interest rates have risen,” Lina Thomas, commodities strategist at Goldman Sachs Research, noted on the bank’s blog. investment based in New York.

“It’s very strange. Generally, higher interest rates make gold less attractive – because gold earns no interest, unlike bonds. » After the United States and other Western countries began freezing Russian central bank assets held in those countries’ financial institutions, this logic was turned on its head.

“This was a wake-up call for central banks around the world,” Thomas continued. “They started to diversify their reserves away from the dollar and into an asset that no one can freeze: gold. » Thomas predicts that this gold will reach $3,000 per troy ounce by the end of next year.

So where does Russia find its gold?

In 2022, Russia was the second largest gold producer in the world, tied with Australia with 320 tonnes mined per year, or 10.3% of global production. They rank just behind China with 330 tonnes, or 10.6% of the world share. (The United States came in fourth place, behind Canada, with 5.5 percent, while South Africa, the world leader as recently as 2006, had slipped to seventh place this year- there, with 3.3 percent.)

The largest gold mining companies in Russia, according to Statista figures for 2021are: Polyus, one of the largest in the world with around 85 tonnes produced that year, followed by Polymetal International (35 tonnes), then Kinross Gold, Petropavlovsk, Nord Gold, Uzuralzloto and others. To get a sense of orders of magnitude, Polyus reported operating profit of $1.58 billion in the first half of this year.

These companies mainly sell their gold to Russian commercial banks, such as VTB Bank, MDM, Sberbank and Gazprombank, the financial arm of the majority state-owned energy company, Gazprom.

They in turn sell the gold to Russia’s central bank, the Bank of Russia, which owns and manages all of the country’s reserves. It stores two thirds of its gold in Moscow, in a safe at Ulitsa Pravdy, and the rest in a building in St. Petersburg.

A new “gold trade route”

One of the biggest problems for Russia’s sanctions-hit economy is that the value of the ruble has collapsed and it has no legitimate access to dollars or euros.

According to the American think tank RAND, Russia appears to be “exchanging gold for hard currencies, weapons and foreign goods, creating a new gold trade route between Russia, Africa, the Middle Orient and China,” its analysts wrote in September.

“By the time of Russia’s full-scale invasion of Ukraine in February 2022, it had acquired gold at a faster rate than any other country in a decade,” noted John Kennedy, leading researcher in this field for RAND.

An Executive Order from the Office of the US President (EO 14024) has been in effect since the start of the full-scale invasion of Russia, declaring that “persons found responsible for or complicit in, or having directly or indirectly engaged or attempted to engage, Deceptive or structured transactions or transactions intended to circumvent U.S. sanctions, including through the use of assets such as gold or other precious metals, are subject to sanctions.

Nonetheless, “Moscow uses gold to support its war economy and bolster access to essential goods, while holding considerable influence over gold production in Central Asia and Africa,” Kennedy wrote.