Sanctions on Russia usher in new era for gold

For as long as Warren Buffett has been value investing, which has been seven decades, gold bugs have been spruiking their favourite precious metal’s ability to safeguard a portfolio during times of war and act an inflationary hedge when fuel prices rise. An inflationary hedge is one that protects against the decrease of the Australian dollar due to rising prices.

• Gold is negatively correlated to equities, helping protect portfolios in periods of war.
• Gold together with equities in a portfolio, lowers overall volatility.

As Russia’s invasion of Ukraine drags on, the West has taken unprecedented steps to destabilise the Kremlin by announcing further sanctions that block financial transactions involving Russian gold reserves. According to the US Treasury Department, “US persons are prohibited from engaging in any transaction – including gold-related transactions – involving the Central Bank of the Russian Federation, the National Wealth Fund of the Russian Federation or the Ministry of Finance of the Russian Federation.”

The rule effectively bans gold dealers, distributors, wholesalers, buyers and financial institutions from buying, selling or facilitating gold-related transactions involving Russia. The purpose here is to prevent Russia from using its gold to support its currency and circumvent the impact of recent sanctions. Currently Russia has the fifth largest stockpile of gold bullion in the world, with between US$100 billlion-US$140 billion in gold reserves.

Jodi Stanton, CEO of Rush Gold, offered her insights into this geopolitical event, saying that Australia is in a strong position to benefit from the recent Russian gold sanctions. She says, “As a major global commodity producer, Australia is in a strong position to benefit from the renewed global focus on commodities, especially if we focus on balance-sheet repair instead of further expansion of our national debt, which has doubled over the last three years.”

Spot gold has risen to A$2,625 an ounce, or US$1,946 an ounce.

The gold sanctions imposed on Russia are a world first. “These currency sanctions are unprecedented because they have never been tried before on such a major scale. Even during World War II, the US and its allies allowed the Bank of International Settlements (BIS) to continue to process transactions from the banks in Nazi Germany,” says Stanton.

“Since 1971, when US President Nixon severed the last connection between the dollar and gold, the world monetary order has been based primarily on the expansion of debt, and not primarily on resources or on industrial dominance,” she says.

It’s good news for commodity-based currencies, like Australia’s. Stanton says, “Bank currencies with connection to commodities have strengthened over the past year. For instance, the Chinese yuan increased by 11 per cent, the Mexican peso by 9.7 per cent, the Brazilian real by 21 per cent and the South African rand by 11 per cent. That even these less-prominent currencies are rising shows that resource backing for currencies is an idea whose time has come.”

A self-fulling prophecy? Perhaps, as sanctions on Russian gold will support a rising gold price that in turn will spawn further interest in the yellow metal. If history is anything to go by, gold has stepped up to the challenge and served to protect wealth most notably throughout the 1970s. And so, demand for gold should continue to rise post-Ukraine, with the market in little doubt that rates are heading higher in 2022. Interest rate hikes may prove a catalyst for higher, not lower gold prices, as seen in the table below, sourced from The Perth Mint.

Ishan Dan

Ishan is an experienced journalist covering The Inside Investor and The Insider Adviser publications.