David Fickling

Russian Oil Sanctions Upended the World. Gold Bans Won’t

Last month, sanctions on Russia upended the oil market, the world’s biggest commodities trade. Now, Group of Seven leaders are proposing to repeat the trick with the second-biggest trade, gold. Don’t expect the same reaction.

Between European Commission President Ursula von der Leyen first proposing sanctions on crude in early May and the package being introduced a month later, prices for Brent rose about 14%, on top of the 8.4% rise they’d seen since the invasion of Ukraine began in February.

Gold has had a quieter year, down 3.9% since Russian forces rolled across the Ukrainian border. Despite Moscow’s status as the third-biggest producer of the yellow metal, the import bans set to be announced at the G-7 meeting this week in Germany aren’t likely to reverse that bout of weakness.

Partly, that’s just a function of market scale. In a normal year, Russia accounts for about 12% of the world’s crude exports. Almost every barrel that comes to the surface is used within the year, barring movements in the 90 days or so of reserves that major energy importers hold onto.

Gold, because of its price and density, is far easier to stockpile. You could easily place enough bullion to buy the 1 million barrels in a typical oil tanker onto a six-seater dining table.(1)As a result, inventories are vast, with mining adding just 3,500 metric tons a year or so to a 205,000 ton stockpile. Roughly a quarter of gold consumption in a typical year comes from selling or melting down jewelry, coins, bars and industrial metals — and those recycling numbers tend to creep up whenever a shortage of mine supplies puts upward pressure on price.

Russia is unquestionably a major player. The 300 tons it produced last year was only exceeded by China and Australia, and accounted for a crude-style 10% of the global total. What counts for global trade isn’t production, however, but net exports — and on that basis Russia is a minnow.

Its cumulative gold trade surplus over the past 10 years comes to $60.38 billion, a smaller sum than the $60.65 billion that Japan racked up by selling down its private and public holdings of the metal (the country has just a single operating gold mine, which isn’t likely to contribute significantly to this sum). Similarly, Hong Kong has been a far bigger net exporter of gold than biggest producer China, thanks to its role as a conduit for foreign capital into the mainland.

Domestic demand in Russia’s increasingly inward-looking economy has normally been more than sufficient to use up everything coming out of its mines. Exports by miners were under a de facto ban until 2020, meaning that Russia’s banks were the only entities able to sell bars overseas. What was produced was mostly hoarded by the country’s central bank, whose reserves more than doubled from 1,035 tons on the eve of the 2014 invasion of Crimea to 2,302 tons at present, in anticipation of the isolation from international financial markets.

To be sure, Russian mine supplies have been a significant new presence in the global market since the export ban was lifted two years ago. Even so, almost uniquely among commodities, the gold market isn’t really driven by flows of refined metal newly processed from ore, but by the wider macroeconomic backdrop. While there may be less Russian gold out there in future, the opportunity cost of buying yield-free metal is also vastly higher at a time when consumer prices are rising at 8.6% a year in the US, and interest rates are heading toward their highest level since 2008.

In a typical year, exchange-traded funds change their positioning in the gold market by 500 tons or so, driving the price up and down as investors’ appetites swing from optimism to pessimism. That’s going to be far more influential than whether the 300 tons produced by Russian mines end up in a G-7 vault, especially when you consider that the biggest net importers aren’t even signing up to the sanctions.

The world barely noticed Russia’s gold coming onto the international markets two years ago, and it wasn’t troubled when it was suspended from the London gold market in the immediate wake of the Ukraine invasion. We won’t notice it when it’s gone, either.