The "Golden Age" Why did the Russians buy the precious metal?

In just five months, the Russians bought 12 tons of gold bars and coins. The government believes the potential demand could be as high as 50 tons per year. Experts mention the poor liquidity of the metal, and warn of the disadvantages of investing in it.

Experts from the World Gold Council said that the demand for gold in Russia in the first half of the year rose by 350%, as citizens, actively stimulated by the state to invest in gold, bought 12 tons of bullion and coins. These investments, of course, have their benefits, and they may be profitable long-term investments, but they can also lead to losses.

Why is the demand for gold bullion soaring?

Since last February, the demand for gold has increased. Demand remains at a high level because the volatility of the ruble is difficult to predict, and risks in the economy and political life are also still very high, explains Oksana Lukisheva, commodity markets analyst for Otkritie Investments.

On March 2, Prime Minister Mikhail Mishustin said: “Such investments (meaning investing in gold) may be a good alternative to buying currency. At the same time , the head of the Ministry of Finance, Anton Siluanov, described gold as an “ideal alternative” to the dollar. He explained that The US currency is volatile, volatile and "not a worthy competitor compared to precious metals".

The demand for gold bullion has increased, especially after the introduction of new tax exemptions. Earlier, the purchase of a gold bar at the bank was subject to the payment of a value-added tax of 20 percent. It was impossible to recover the tax paid at the time of sale. These costs made gold bullion trading unprofitable for citizens. In addition, the 13% personal income tax on profits from the sale of gold bullion in June was abolished.

How much is gold bought?

In general, during the five months of this year, customers of the Russian SBER Bank bought about 10.9 tons of gold bars, according to the newspaper "Kommersant". VTB Bank talked about selling two tons of gold bars to customers in mid-April, while the bank did not disclose recent data. Other major banks (RSHB, MKB and Sovcombank) have also indicated "high demand for gold" in recent months, and they also did not disclose aggregate numbers. PSB has sold one ton of gold bullion to private banking clients over the past four months.

The explanatory note to the draft law to abolish value-added tax indicated that the potential demand for precious metals in bullion among citizens may reach 50 tons annually, equivalent to 15 percent of production. However, according to estimates by Alina Kolpakova, head of the Sokolov Analytics Center, annual demand for 10-11 tons of small-sized ingots weighing only 20 grams may be required.

What type of alloy is needed? And who buys it?

Experts concluded that most of the rich Russians are actively buying precious metals, because a large proportion of the gold sold in these months was for large bullion. Under current conditions, gold bars weighing 13 kg are cheaper than many small bars that together weigh the same amount. “Wealthy clients often prefer to hold up to 20% of their credit portfolio in physical gold,” said Yevgeny Safonov, director of private capital at PSB Bank.

And the newspaper "Kommersant" wrote that VTB Bank sold ingots up to 100 kg. Customers of MKB were interested in ingots of normal weight from 11 to 13 kg. And at Sovcom, customers often buy bars of 1 kg and 12.5 kg. At Rosselkhoz Bank, bullion weighing 5 kg and 10 kg topped the sales list. The bank noted that five-gram ingots made up 17 percent of the total ingots sold in the past four months, with one kilogram ingots also being common.

At the same time, SBER insists that “the current demand for large bars of one kilogram or more is declining, while the demand for bars of smaller denominations remains high. Nevertheless, economists warn that investing in gold bullion is a long-term investment, Even without tax restrictions.

What are the disadvantages of investing in gold?

Vladimir Sagalaev , CMS Group financial analyst, told Izvestia newspaper that buying bullion is a matter of saving instead of having a big income. The benefit from income from investing in gold bullion can be seen in the long-term outlook, i.e. more than 10 years. Besides, investing in bullion does not generate side income such as stocks, bonds, mutual funds and deposits. This may be a problem if the client is looking for a way to generate side income through investments.

The key point is also that banks buy back bullion in a limited number of branches and mostly their own bullion. At the same time the purchase price is 15-25% lower than the selling price. Now we can count on an increase in the value of gold only in the event of a depreciation of the Russian currency.

Besides, it is necessary to provide experience and ideal conditions for the "precious metal" for sale. "Damage to the gold bar, even a small scratch, immediately reduces its value dramatically," notes Yevgeny Nadurchin, chief economist at BF Capital.

You should also keep in mind that due to the high price and value of bullion, it is prone to theft. Here it is best to store them in a safe place, for example in a basement, although it may be an ideally inappropriate place, says financial analyst Sagalev. Or better yet, "Put it in a bank, but you'll have to pay for this service." Sagalev also notes that alternatives, such as gold accounts and gold exchange ETFs, do not have storage problems, as they are "fiat" gold investments.

How did the price drop?

There is a “but” about which the authorities and banks prefer to remain silent now. The Moscow Times writes that those who had bought gold at the height of the sanctions panic soon discovered that their gold was rapidly declining. From 7.7 thousand rubles per gram on March 11, the price of refined gold set by the Central Bank of Russia fell by 56 percent to 3.4 thousand rubles as of August 5.

Therefore, the amount of gold held by individuals at the end of the first quarter, 33.7 billion rubles, fell to 22.2 billion rubles on August 5. Thus, the loss in this period, according to the calculation of published data, amounted to 11.5 billion rubles, according to the official data of the Central Bank.

However, the gold boom has not abated yet. “Additional support to sales will be provided by intensifying the process of devaluation, which may bring some money from the population’s accumulated foreign exchange reserves (according to the latest central bank estimate, about $85 billion) to the gold market,” says Lukisheva, a commodity market analyst.

Where is the bottom line?

On the bright side, the price of gold does not fall and does not fluctuate much even during a crisis compared to other assets such as stocks, Sagalev said. Gold also has a steady rise in value. He stressed that gold in this case is considered a "good protective asset and a means of saving."

He explained, "Historical data shows that gold performs well in inflation rates during economic ups and downs. If the currency is virtually worthless, then gold prices will rise just because it will be valued in the same monetary unit, and this means that gold is one of the best protections against inflation."

In addition, gold bars, and gold in general, can be used as collateral for loans. It is known that it is easier for companies to obtain a loan that contains gold as collateral, because it is a tangible asset of high value. Ordinary Russians should remember, however, that gold bars equate to property, so when you do business with them, you can take advantage of the appropriate tax credit.